Prairie Yarns Investment

Good to know if you want to start investing: Invest Tips

What are the risks of investing via crowdfunding?

What are the risks of investing via crowdfunding?

There are many good reasons to invest through crowdfunding. You like to help entrepreneurs, build your own portfolio or go for an attractive return. But investing via crowdfunding is not without risk. That’s why we explain the risks for you.

Investing via crowdfunding: always do preliminary research

If you’re considering investing in business loans through crowdfunding, you’d do well to research the risks first. This way, you can better understand what the risks mean for your equity before you put your money into a risky product. Good preparation helps you to continue to invest with pleasure and to spread your risk.

Why are there risks when investing via crowdfunding?

Unlike with a savings account or savings deposit where an amount of up to € 100,000 is guaranteed by the Dutch deposit guarantee scheme, when investing via crowdfunding you run the risk of losing (part of) your deposited money.

This can happen when a company in which you have invested via a business loan is (temporarily) unable to meet its interest and/or repayment obligations or goes bankrupt. The company will then not be able to repay the loan you have provided.

What happens if an entrepreneur is in arrears?

It is possible that a company in which you have invested may be in arrears. It then depends on the platform where you have arranged the investment, how it goes. Our partner Collin Crowdfunding will, for example, enter into discussions with the entrepreneur to make up for this delay, or to resolve it in another way. In practice, this means that entrepreneurs can be brought into contact with other investors or that the loan conditions can be reviewed.

Revision of loan conditions

A review of the loan conditions is done to reduce the pressure on the entrepreneur to repay. This can mean, for example, that the loan, and therefore your investment, is extended for a certain period of time. A revision of the loan conditions is always first submitted to the investors. As soon as more than 50% of the investors agree to the revision of the loan conditions of a loan, the proposed revision becomes final.

What is a provisioning percentage?

An entrepreneur’s arrears are temporarily offset against your return. In the event of late payment, a provisioning percentage will be reserved of the outstanding loan amount that an entrepreneur still has to repay to you. This percentage increases as the payment arrears continue.

Depending on the duration of the arrears, this provision percentage will be deducted from the return on your portfolio. As soon as the entrepreneur has made up the arrears, the provision will be reversed.

The difference between provision and actual loss

The actual loss is only determined after a bankruptcy and the full recovery of all collateral provided for the loan in question. It is important to keep in mind that there is a difference between the provision and the actual loss.

What happens when a company goes bankrupt?

If a company goes bankrupt, a claim arises with the receiver. Your investment often does not have a preferential position. That is why you usually end up at the back of the queue with the rest of the ordinary creditors.

Certainly if there are other creditors who take precedence, you as an investor often have little chance of getting your deposited money back. This depends on the securities provided and the value they represent.

What is the use of establishing securities?

The position of you as an investor varies per type of security. Your position is better if collateral has been established in the context of your business loan. However, this varies per business loan. You will always find this information in the pitch.

How are securities enforced?

On the basis of legal agreements and securities offered, this foundation will, if possible, try to recover as much of the amount from the bankrupt company as possible.

Distribution of the proceeds

Usually other creditors take precedence in the distribution of the amount that a receiver in the bankruptcy gets together with, for example, the sale of the household effects. You can read back in the pitch which party, in case of bankruptcy, is the first to claim this amount. Note: not all parties that have priority are mentioned in the pitch.

If the entrepreneur’s debt is higher than the amount that a trustee can earn, there is a good chance that you will lose all or part of the outstanding amount, including interest.

Rule of thumb: net return versus risk profile

In general, the higher the expected net return on an investment opportunity, the higher the risk profile of the loan offered.

Always keep this in mind when you decide to step into a new investment opportunity. You can make a nice profit, but there is a big risk that you will lose the money.

Investing with reason and pleasure: this is how you do it

Investing via crowdfunding is only wise if you are well-informed and aware of the risks. That’s why we would like to tell you more about how you can limit your risk with the right precautions. In this way you will be stronger in your shoes when you invest and you will ultimately run less risk.

Pay attention! This article is not meant as personal advice to start investing through crowdfunding. Investing via crowdfunding involves costs and risks. Your investments can be worth more, but also less. That’s why you should always make your own decision as to whether investing via crowdfunding is justified in your situation, given the risks involved. Make sure you are always aware of the risks you are running. Don’t invest via crowdfunding if you have little knowledge and experience with risky investments or if your financial situation doesn’t allow it.

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