Crowdfunding has become a popular method for businesses to finance themselves and for investors to boost their savings. However, with so many crowdfunding projects available, it can be difficult to choose the right one. Here are the four most important factors that help you how to choose a crowdfunding project:
1. Interest Rate
The interest rate of a project determines the return you can expect to receive on your investment. This rate is correlated with the project’s risk (which we’ll cover below). Regardless, investing in crowdfunding involves higher risk than saving money with a bank. Therefore, it’s important to invest in projects that offer a healthy margin above the risk-free return on a bank account for instance.
How does October do this?
Our goal is to apply an attractive interest rate to a loan, for both the lender and the borrower. We review our pricing on a monthly basis, taking into account market developments so that we can quickly adapt our pricing to the market. We have developed a pricing policy that helps us with this.
2. Risk
All investments come with the risk of losing your investment, but some crowdfunding projects are riskier than others. Most crowdfunding platforms help you choose a crowdfunding project by providing an estimation of the project’s risk. The platform conducts an analysis of the project, the company, and the financials to determine the risk, often translating it to a credit score. If not, the crowdfunding platform should provide enough information for you to make your own estimation of the risk.
Crowdfunding platforms also use risk mitigators, such as securities. Similar to banks, crowdfunding platforms often ask for securities and agree on what happens in case the borrower is unable to repay the loan. Securities can reduce the risk of capital loss since you can fall back on the guarantor or the collateral in case of a default. Moreover, securities can incentivize the borrower to repay the debt to avoid personal liability.
How does October do this?
At October, we apply a credit score from A+ to C- to every project, giving a quick indication of its risk and allowing comparison with other projects. We describe how we determine the credit score for a project here. Additionally, we have started asking for securities more frequently, such as personal guarantees, corporate guarantees, or state guarantees. We have updated our project descriptions to show which securities are being asked for, which you can see here.
3. Duration
When you invest in a crowdfunding project, your investment is typically locked in for the duration of the project. This means you cannot access your money until the project is complete. Therefore, it is important to consider the duration of a project before investing, and to avoid investing money that you may need in the near future.
However, borrowers often prefer longer project durations because it reduces the burden of repayments on a company’s cash flow. To make longer durations attractive for investors, the interest rate for longer projects is usually higher. This also offers the added benefit of locking in your investment for a longer period of time if you are happy with the interest rate.
How does October do this?
At October, most projects repay interest and capital on a monthly basis. This means that your investment is locked in for the entire project duration, but you gradually receive your money back over time. This also allows you to reinvest and benefit from compound interest. However, project duration still plays a role in the pricing of our projects. We use 48 months as a baseline, and offer discounts for shorter projects and charge a higher price for longer ones. Ultimately, you have control over your investment as we offer projects between 3 and 84 months, and you can choose the duration that suits you best.
4. Crowdfunding project and the company
Crowdfunding is becoming increasingly popular as more and more businesses use it to finance their projects. Not only start-ups, but also established businesses are turning to crowdfunding for their working capital needs. This helps promote access to finance for SMEs, who often struggle to secure funding through traditional banks. Additionally, crowdfunding allows you to invest directly in businesses and have control over where your money goes. You can choose to invest in projects from certain countries, sectors, or those that promote the environment. On the other hand, you can also avoid investing in certain projects that don’t align with your values or you don’t believe are good investments. It’s important to consider these factors when choosing a project.
How does October do this?
At October, our mission is to finance businesses better, so we are open to a wide range of companies. However, we do have certain filters in place. Each project undergoes a risk analysis and receives a credit score. If the score is too low, we don’t proceed. We also advocate for ESG, excluding certain sectors and activities from financing on our platform. These are the filters we apply to projects, but you can apply your own additional filters based on your personal preferences.
Don’t stop at 1
This header has a double meaning. We urge you to consider all of the four aspects, and not to solely focus on the interest rate when you choose a crowdfunding project. It is not the only factor to consider. Additionally, we strongly recommend diversifying your investment across multiple projects rather than investing in just one. This spreads risk and diversifies your portfolio. And, of course, never invest more than you can afford to lose.
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