You have probably heard of crowdfunding before, but have you considered using it to fructify your savings? Before getting into the details, bear in mind that there are many types of platforms, each for a specific purpose: donation, reward, equity and peer-to-peer (P2P) financing.

Which type suits you better?

Crowdfunding is a way that enables masses of contributors to contribute sums of money to charitable or profitable projects. It gained traction since 2012 with a rocketing growth rate of more than 200% per year in terms of funds raised worldwide (from $2.7bn in 2012 to $34.4bn in 2015[1]).

There are in general 4 types of crowdfunding; Lending-based comes first, followed by donation-based, reward-based and thereafter equity-based crowdfunding. We will touch on reward-based and donation crowdfunding concepts. Donation-based models do not yield any material returns on funds contributed. The reward-based model emerged as an alternative mode to finance creative ideas by collecting small amounts from a large crowd of supporters (also called backers), believing in the ideas’ success.  As a reward for their material support, they usually receive gifts from projects’ owners or get to use the product for free. Despite its success, both of the aforementioned methods are not a suitable avenue for you to grow your money.

The remaining two, lending and equity-based crowdfunding, are what we can call investment-based crowdfunding. And that’s what you should be focusing on!

How does investment-based crowdfunding work?

People tend to associate crowdfunding with either rewards or donation. Yet, investment-based models offer the opportunity for small investors to invest in profitable ventures, yielding returns higher than the market, up to 16% per year!

Investment crowdfunding websites provide a platform connecting borrowers and fund seekers to potential investors. On one hand, parties seeking funds get the opportunity to present, promote and sell their project. On the other hand, investors get to choose where to place/invest their funds from a wide variety of choices.  This enables them to diversify their risks and optimise their returns. Moreover, investment-based crowdfunding gives the right to small investors to decide who lend the money to and which project to invest in, no matter how small their bids are.

Investment-based crowdfunding […] yielding returns higher than the market, up to 16% per year!

Which one is more profitable?

Investment-based crowdfunding includes peer-to-peer lending, project financing, equity financing, real estate, royalties and others.

In equity crowdfunding, investors are entitled to a share in the financed company (mostly start-ups and SMEs). Thereafter, investors need to wait until an exit strategy is available (either through IPO, buyout etc) to get back their principal + returns. A major point of contention is when that would happen and whether the venture will be successful. However, in cases of successful buyouts, investors can see their capital multiply many folds.

In peer-to-peer (P2P) lending, lenders finance other borrowers’ needs according to their credit rating, risk profile and financing purposes. Interests are often earned on a monthly basis and depend on the creditworthiness of the person or the business financed. The main advantage of these investments, as compared to equity crowdfunding, is liquidity.

A majority of the P2P lending space is interest-based. But have you heard of interest-free P2P crowdfunding?

Did We just say “Interest-Free” P2P crowdfunding?

Yes, you read it well. A unique and a brand new mode of P2P crowdfunding emerged recently in Singapore, using the same concept of mainstream P2P lending but based on profit-sharing. EthisCrowd is a social impact, real estate crowdfunding platform that utilises a profit-sharing model. The salient feature of this type of crowdfunding is that it allows investors to share in the performance of the projects financed instead of earning a fixed return. Earning a profit share increases investors’ probability of gaining higher returns on their capital (EthisCrowd provides average annual returns of up to 15%!) compared to the conventional P2P crowdfunding. (See also: What is Islamic Crowdfunding?)

Do I risk losing my money?

Although investment-based crowdfunding offers enticing returns, it comes at a cost. Crowdfunding platforms are just intermediaries. They are a marketplace matching those who are seeking funds with those who are willing to invest. The actual deal is between lenders/investors and borrowers/entrepreneurs. Hence, any shortcomings from the latter’s side will directly impact the fund providers. In a worst case scenario, investors can see their money vanish. It is, therefore, wiser to study projects carefully, engaging in due diligence before choosing on where to invest This will lower the individual’s risks and maximise their return

The Bottom Line

Investment-based crowdfunding can be highly profitable depending on investors’ risk appetite. At the time markets are still staggering, investment-based crowdfunding is a viable add-on to your investment portfolio. Not only are the returns higher than the market, but the availability of transparent information on individual projects provide individuals with numerous opportunities to choose an investment-based on their preference and risk profiles. Crowdfunding is at the forefront of the financial technology revolution, and we should embrace it!

For an overview of the potential of Islamic finance, check out Can Islamic Finance Serve 2 billion Muslims?

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Sources:

  • Massolution Crowdfunding Industry 2015 Report

EthisCrowd.com is the world’s first Real Estate Islamic Crowdfunding Platform. Our international community of 20,000 private investors crowdfunds investments in entrepreneurial, business, trade and Real Estate activities in Emerging Asia.

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