Crowdfunding and peer-to-peer lending has become increasingly common over the past few years, and for good reason. It has made credit available to those who might be unable to obtain finance from traditional institutions and given small investors the opportunity to seek high returns on small amounts of cash. In the post-2008 world with cautious banks and low interest rates it is easy to see why this is an attractive proposition. However, someone looking to invest in such a scheme should think carefully about a number of factors.
In particular, are you happy to put money into a company which will make decisions about the use of those funds. You will own a share in the company which may give you a say in the running of the company but this will be alongside tens, or hundreds, of other people. You need to carefully read the fine print to see what the company is allowed to use invested funds for.
If another lender also has security on the development, what is the likelihood that, when the development is sold, your share will be realised? What happens if there is a downturn in the market and the development is sold early, or the builder ceases trading? Think about worst case scenarios and satisfy yourself that your capital will be suitably protected - or accept that you may lose it all.
In the same way that you would not buy a house without a solicitor or conveyancer investigating the title, do the same with a crowdfunding investment. Ask why does the development need crowdfunding when traditional financing might be cheaper - will lenders not lend because of something unusual on the development - or is the developer choosing crowdfunding for another reason (such as flexibility)? If the former, does that unusual element put you off lending also?
Ultimately new funding mechanisms are likely to be here to stay and may well play an important part in assisting more development to come forward. This platform is very upfront with the risks involved but the importance of carrying out due diligence cannot be overstated.
A new crowdfunding platform is allowing retail investors the chance to back residential property developments by investing as little as £500. The start-up, called Homegrown, is giving individuals the chance to invest in developments - such as a converted milk processing factory that's being turned into flats and offices - and claims projected annual returns of around 12 per cent over roughly two years. But this is a high-risk investment and questions are being asked about the property market.