Is 20% interest rate too much?

Some investors get concerned when they see an investment opportunity yielding 20% and above. We at CROWDESTOR are proud to pass the investment return to our clients and think that this is completely fair. Read why we can afford to pay such interest rate and how it is formed.

Who said it is too much?

If you are an investor living in Europe and new to the alternative investments, and to the crowdfunding industry you are probably used to either very low-interest rate or high volatility. So, when you stumble across a yield above 20%, it is a red flag for you. This is not the case for modern Fintech companies, such as CROWDESTOR. The crowdfunding industry is a relatively new phenomenon, which allows individual investors to participate in the financing activities of promising startups as well as established businesses.

When comparing to the stock market, 20% per year does not seem so high anymore. The stock market index of the largest companies listed on the US stock exchanges S&P 500 has earned (including dividends) 31% in 2019 and 21% in 20171. Of course, this return is hard to predict as the stock market is very volatile, for example in 2018 the same index has fallen (-4%). The share prices are depending on the fundamentals of the companies, the economic conditions, the internal policies, and many more.  

Investing in Businesses

Previously, investing in businesses and startups was a privilege of large individual investors (Angels) or the Venture Capital (VC) funds, where the barriers to entry (minimum investment) are also very high. An average Angel investor’s backing up of the startup in Europe was EUR 200,0002. This is far from accessible for the European middle class and is not fair.

Thanks to financial technology (FinTech) the crowdfunding platforms now able to accept investments in startups and businesses almost to anyone in Europe, regardless of the sum available for investing. Moreover, it is possible to funnel these investments to selected beneficiaries. CROWDESTOR accepts investments in some projects starting at EUR 50. The FinTech allows us to accept, manage, perform KYC and AML checks, to account, and to distribute repayments to a very large number of individual investors, which was never available before.

We believe that anyone should have a right to invest wherever they want regardless of their initial capital. So, putting barriers such as high minimum investment is letting the rich get richer. However, it is important to keep in mind that investing is a risky business and needs to be responsible. Even though the barriers to entry are much lower with crowdfunding it is important to acquire knowledge and necessary information before making an investment decision. The most important fact to understand is that the interest rate is a reward for the risk you are taking.

Risk/Reward Ratio

Putting money in a European bank deposit can be considered as a risk-free investment, but it pays a very low-interest rate or even negative interest. Investors all over Europe are in a desperate search for yield. When they see the attractive interest rates, they forget that this isn’t risk-free.

Investing in the growth stage companies and startups is a risky activity, but with high earnings potential. That is why CROWDESTOR rewards its investors 20% on average. Businesses can encounter delayed payments, force major situations (just like the crisis we are facing now), and other changes of plans which can affect the repayment schedule. So, prior to making an investment decision, each investor must evaluate their own risk tolerance level.

Besides, it is easy to reduce the risk by diversifying your investments. CROWDESTOR offers investment opportunities from various industries that’s why it is a good idea to spread the investment amount between different projects. Besides, to diversify the overall investment portfolio try to include other investment assets.

Alternative Lending

CROWDESTOR is not just an alternative investment platform. It is also an alternative lender. Small and medium-sized businesses (SMEs) are a backbone of the European economy and a major source of economic growth. Unfortunately, in the aftermath of the financial crisis of 2008, traditional lenders such as banks have increased their demands towards businesses seeking loans. Besides, getting a business loan is a bureaucratic and time-consuming process. As a result, many businesses are underserved and/or are seeking a modern innovative lending solution.

CROWDESTOR SME Automation product offers such solutions. Businesses can fill in the application form and receive the decision completely online within a day. Moreover, the business will receive the credit report regardless of the final decision to get an understanding of what can be improved. Such service is faster, more convenient, and comes with a higher interest charged for such loans. Businesses are paying the interest rate higher than in banks, and we at CROWDESTOR after keeping our commission are passing the interest rate to our investors. That is how 20% interest is possible.

Comparison to P2P platforms

With personal loans, where investors get lower returns, the borrower sometimes pays 365% APR (annual percentage rate) in Russia where the government puts a ceiling on the maximum interest rate. Sometimes the effective APR (including all penalties and delay fees) the borrower gets charged more than 1000% in some countries where regulation fails to limit micro-financial organizations from imposing additional fees.

No wonder such loans are called “Shark Loans”, as they are bringing more danger, than safety. The borrower usually takes the loan for a short time and does not realize that the interest rate on the small borrowed amount is off any limits. The investor, on the other hand, gets rewarded only a small fraction of the earnings, because personal loan investment marketplaces are taking advantage of the low-interest environment in Western Europe.

CROWDESTOR does not participate in financing the loans to private persons, no matter what the loan purpose was. We choose to finance entrepreneurs with ambitious growth plans, innovative ideas, or who see opportunity when others don’t. We participate in the due diligence process to remove too risky projects. However, the risk is still present, as any investment possesses the risk. This in turn allows us to offer attractive yield and let businesses bring exciting projects to life.

 

Sources:

  1. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
  2. https://www.statista.com/statistics/889702/average-angel-investment-per-company-in-europe/