Thursday 04 June 2020

Commercial crowdfunding often ends in bankruptcy, research finds

Photo: Depositphotos.com

Dozens of small businesses which turned to commercial crowdfunding for loans went bust shortly afterwards, investigative journalism platform Investico has found.

The platform looked into the bankruptcy reports of a number of businesses and discovered that entrepreneurs who got commercial crowdfunding loans were going under because of extremely high interest rates and loan pay offs, or because they were wrongly assessed.

Commercial crowdfunding platforms, such as British-owned Funding Circle or Collin Crowdfund, have no banking licence but are allowed to operate by the Dutch financial sector watchdog AFM.

That means supervision of the sector is minimal, Investico said, and that practices such as extending loans to companies that cannot pay them back and extortionate interest are rife. In the case of Funding Circle the interest on a loan can be up to 20%.

Typically it is small businesses with not enough turnover to pay monthly costs, or which have a debt to the tax office which will apply to the platforms.

Crowdfunders make their money from ‘technically bankrupt businesses’ and reward ‘unclear finance proposals’, lecturer in financial-economic innovation Lex van Teeffelen told Investico.

Risks for the crowdfunders are limited because they demand collateral in the shape of the lender’s own money or even that of his family. It is not known how many entrepreneurs have had to turn to relatives to pay off the debt.

In a reaction, the economic affairs ministry rejected the claim of lack of supervision and said the practices of Funding Cicle had been scrutinised extensively.

The ministry, Investico said, is strongly in favour of crowdfunding now that banks are adopting more stringent norms for loans to small businesses.

The research was carried out together with Trouw and the Groene Amsterdammer.

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