Fernando Padilla
Expert Contributor

Crowdfunding: What Is This?

By Fernando Padilla | Wed, 06/09/2021 - 15:21

Everything in life, from companies to what we consume, costs us because of the intermediation of someone to make things happen, to bring things to us. For example, a farmer who grows tomatoes in Sinaloa sells them to a regional distributor, who in turn sells them to a large distributor or to a central supply company, which connects the products with huge supermarkets or stores to be acquired by the final consumer. Each person who is involved in the distribution of tomatoes earns money; this increases costs, and the final consumer ends up paying for it.

In all the products or services that we consume, prices are always affected by intermediation. For this reason, we observe how the birth of companies such as Uber or Airbnb changes the dynamic of marketing and disintermediation; namely, by removing distributors from the middle so that the producer can reach the final consumer at a better price. Current technology facilitates this: nowadays at least 60 percent of Mexicans already have a cellphone with apps where we can purchase products or services.

Traditional business models are going to suffer. Companies do not have to go technological because the world is going digital or because Facebook exists, they must do it because the consumer (the clients) and his or her habits are going digital and are looking for better opportunities.

This revolution is happening in all sectors of the economy and the financial sector is no exception. Peer-to-peer and crowdfunding are concepts that we are hearing more and more about in the media, even though few people understand them fully. In Mexico, only 22 percent of entrepreneurs know of their existence, according to a study by INEGI and the CNBV. In simple words, these concepts refer to connecting people who have money with those who need it, removing intermediaries, at least the traditional ones.

The traditional intermediator is the bank, which has the money of its savers. The way the bank makes money is by lending it to people who need money, through credit cards, simple loans and business loans and charging commissions. But for financial institutions to take care of money they need security measures, branches, ATMs, internet banking, huge buildings, executives, and managers. That costs money, so the cost of a loan in a bank is high and the return to the saver is very low.

What the crowdfunding model seeks is to move the money that you have saved. Instead of having it under the mattress or sitting in a bank account where it will not pay you anything or almost nothing, crowdfunding platforms connect you with people or companies that need money and lend it, taking part of your money, what you are willing to put to work, and lending it to other people or companies for a return, company actions or some profit.

Clearly, many of these platforms do an initial filter of people or companies that need credit or some type of financing. They investigate, rate, do a risk analysis and publish these by placing the information in a transparent way. They also put you in contact with the potential creditor so you can ask any question you want to ask. In this way, you decide to whom you lend the money you have saved, playing the role of banker, and the profit returned is for you. In this way, you are eliminating the expenses of all the infrastructure that banks have, and this is reflected in the fact that the credit is cheaper for those who request it, since the platforms do not require spending on branches or facilities, only its own maintenance.

Another advantage of these platforms is that they are available to everyone and you will not need large amounts of money. Your investment can  practically start from MX$50.00, depending on the platform but, in general, the minimum investment is normally very accessible, which makes it achievable for everyone.

Another important fact is that these platforms are not only for entrepreneurs outside of the financial system, there are many financial institutions, banks, SOFOMES (IFNB), among others, participating more and more actively in this type of solution, which provides much more security and support to your operation.

Here are the different types of crowdfunding platforms:

Loan or debt: They connect a person or companies that have money with those who need it through an investment, a promissory note system, or a lease as the way in which they will recover their money and generate profits. A modality is the direct loan to the person or company and in others you even have real guarantees such as property, equipment, and machinery.

Examples in Mexico:

Financing companies: Lendera crowdleasing, Cumplo, Red Girasol among others

Financing for individuals: Prestadero, Doopla, yotepresto.com, Afluenta, among others

Financing to the real estate sector: Briq, 100 Ladrillos, M2crowd among others

Capital or equity: A company needs money to start or grow, and in exchange they offer you a percentage of the company’s activities. So, the way you are going to put your money to work is by buying the activities of this company, in which you can get a profit if the company generates good results. Your money is backed by actions of real companies.

Examples in Mexico: PlayBusiness, Propeler, Arkangeles, among others

Exchange: A company needs money to develop a new product, or a person is going to develop a project and in exchange for your investment gives you a valuable product, such as a signed photograph, a painting or the first model to be manufactured or similar. If the money is to develop a new product, they can offer you to be one of the first users of that product; for example, if it is to edit a book of photographs, in exchange for your investment they would give you the book autographed by the author, or if it is a musical group that requires money to release their first album, they can offer you an autographed record or CD in exchange, which in the world of music has great value.

Examples in Mexico: Micochinito.com, Fondigy, Kickstarter among others.

Donation: As the name suggests, it is used for projects, businesses, or people, mainly related to social issues or problems in the country and the world, to connect and seek funds for their causes.

Examples in Mexico: HipGive and Donadora

These are the four types of crowdfunding platforms, and the only thing they are doing is disintermediating the money process so that those who have the money and those who need the money can benefit. In Mexico, the main and most serious collective funding platforms can be found in the AFICO (www.afico.org), where you can find more information about the industry and the players in the country.

Photo by:   Fernando Padilla