Crowd2Fund is one of a small number of new peer-to-peer ‘social’ lending providers authorised recently by the British FCA. This article is offers a review of Crowd2Fund, emphasising my personal experiences of the Crowd2Fund platform after 6 months.
Note: This article is not sponsored, but does contain referral links.
Unless you have had your head under a rock, you won’t have failed to notice that cash savings and bond returns have been dire for the last decade. Although following a nominally upward trend. Stock market returns have been topsy turvy. Especially so in Britain, where the inexorable chill of the ‘EU question’ has for three years blighted investors of all levels into patient contemplation.
The IFISA or “Innovative Finance ISA” was an eventual response to the 2008 financial crisis. Designed to both encourage savings growth and stimulate lending. The IFISA would allow non-traditional investment providers to enter the tax-exempt ISA market. The idea was to attract mid-long term savings away from the traditional “cash” and “stocks and shares” stalwarts offered by institutional banking providers.
Ratesetter and Crowd2Fund emerged as the front-runner peer-to-peer IFISA providers. Regulated by the FCA, both offer ISA wrappers outside of the Financial Services Compensation Scheme umbrella – like any stocks and shares ISA. This means that you are not protected against your first £85,000 in losses.
How does Crowd2Fund work?
Put in the simplest way possible. Crowd2Fund allows you to invest a lump sum inside a tax-free ISA wrapper. You, as an investor then channel the full amount, a few lump-sums or many micro-loans into different businesses to create your own portfolio via the platform. Businesses vie for your investment via opportunity campaigns and it is up to you to pick based on your own ethics, risk profile and interests.
As a new investor, the ability to issue micro-loans is an important factor. Without experience of investing, or the skills of a financial analyst it is difficult to judge the viability of a business. By making small loans (in the £100’s) you can effectively spread your risk from loss. This allows you to invest in lots of companies at the same time, gaining critical investment experience as you do. Statistically, this means the bulk of your capital is safer in the long-term, with risk being spread widely. Come next ISA year, you will have a better sense of what works for you and what doesn’t. Allowing you to make better and more confident decisions.
Crows2Fund has no up-front fees: no joining fees, no account management fees and no investment fees. Equally there are no fees on you adding money into your Crowd2Fund account, nor for holing an non-invested balance in your account. As in investor you are charged a 1% commission on the deposit of a repayment back from a business. That is it.
Crowd2Fund investments can be found in two forms forms:
- New “opportunities” (companies seeking to raise new capital as part of a campaign).
- The purchase and transfer of existing debt (funded campaigns) via the “exchange”.
You can mix and match either and invest at any time up to the value of your ISA allowance. You can invest over and above your ISA limit, however it will be subject to capital gains tax when you trade.
Crowd2Fund offers (on paper) 6 types of investment (shown in ascending order of risk).
Loan: A loan is like a normal car loan or a mortgage. The business borrows £x.xx over n months at y%. This creates a fixed monthly repayment for the business over the n months. It is calculated such that after the last repayment the outstanding loan figure is £0.00 and the debt is settled (paid off). With each repayment, the amount of your capital held by the business also reduces. This means that you will slowly see a reduction in the size of interest repayments over the course of the loan.
Revenue Loan: Revenue loans are similar to a standard loan. The difference is that the monthly repayment is variable as a percentage of revenue received by the business. This is useful for start-ups and seasonal businesses where revenue in some months may be very low, but higher in others. In the good months, a proportionately larger amount must be repaid. The business is also required to transparently disclose its monthly earnings to Crowd2Fund. As the repayment sum is variable, so too is the last repayment date of the loan.
Venture Debt Loan: These are as a standard loan, but are made available to start-ups, very young (not fully established) companies or companies seeking a high risk expansion strategy . Venture debt allows the business to access funding before some banks would consider lending to them. The repayment sum is fixed, however the risk to the investor is substantially higher.
Bond: Similar to investing in the bond market. A bond issuance means that there is no capital repayment from the business each month. Only interest is repaid. Your capital is returned in full as part of the last repayment. Risk is higher as should the business cease trading in month 47 of a 48 month bond, you could potentially lose all of your capital.
Equity: The equity investment is similar to buying shares in the business. You in essence buy x% of the company via your investment. If the company performs well, you will be entitled to up to x% of the profits/dividends. If the company does not perform at all, you get nothing.
Donations: Aka philanthropy. You will not receive any return on these investments, other than good karma and potentially tax relief.
The vast majority of investments on the platform are standard loans and I have yet to see any donations on the platform. At the time of writing it was also possible to invest in Crowd2Fund itself as part of a 3.4% equity investment – although these are likely rarer than donations in practice.
Viewing opportunities on Crowd2Fund is very similar to online dating. A witty opener, a couple of snazzy photos, their age (a 36 month commitment), compatibility rating (12.0% APR) and some awkward photos of the family (the directors). Additional blurb is also available including their Equifax rating, previous years profit & loss accounts and balance sheets.
Information on risk, any available guarantees and the loan type is also provided by Crowd2Fund. After which you can choose to invest immediately, or ask the director(s) a question. Most opportunities have community questions, and these remain visible later via the exchange.
The system falls down slightly in that questions are often allowed to go unanswered, sending a very negative message about the attitude of business owners. There is also no update to the campaign page after the campaign ends. This misses an opportunity for Crowd2Fund to show ongoing success. It also makes it harder for an exchange buyer investing at month 16/48 to assess first year progress.
I feel that it would be better if Crowd2Fund required engagement from directors in answering their questions and that campaign pages should at least be updated with revised P&L/balance sheets on a yearly basis.
Picking investments is a euphemism for research. The provided information is neatly presented and appropriate; but it is up to you to do some background checks. Some ideas include
- Perform online searches for the company
- Check their website / eStore (if applicable)
- Look at Google Merchant ratings and TrustPilot reviews (if applicable)
- Search for the company on Companies House to understand their history
- Look at who they are competing with; do they have an edge?
- Are they a 4000 sqft retailer in a world of eCommerce with no hint of a web focus?
- Do you like the tone and attitude of the directors when replying to questions?
Crowd2Fund of course perform due diligence before allowing them onto the platform. Yet the risk of clicking ‘invest’ is squarely yours.
Once you have invested in a new ‘opportunity’, you have to wait for the campaign to end and subsequently for the legal cogs to turn. Once the debt is issued, an estimated repayment date will appear on your personal repayments calendar. The date on the calendar is the date that the business is expected to make their monthly repayment to Crowd2Fund.
For ‘exchange’ purchases, the repayment date will appear immediately as the calendar is transferred from the seller over to you.
My experience is that repayments occur within 2 – 10 business days of the advertised repayment date. Most are within 2 days, however one of my investments always takes 7 – 10 days (with no explanation as to why).
The repayment comprises of three elements:
Repayment = ( ( Capital repayment from the business + Interest repayment against the loan ) - Crowd2Fund commission )
The final sum will be immediately available in your wallet for re-investment. Having invested £1,000 initially. I found that there was sufficient capital + interest repayment to buy something on the exchange every 2-3 months. I would advise waiting until you had at least £100 available before seeking a new investment as there is little point investing for the sake of investing. At the same time, you should not allowing capital to sit unused for long as doing so will diminish your growth potential.
The good, the bad and the ugly…
Using the platform in 2019. It is clear that Crowd2Fund is well established and that there appears to be a good number of people making investments on a week-to-week basis. New investment campaigns with a strong business case will often be concluded within less than 24-48 hours. Showing strong community engagement. With that said, the platform is not perfect. So I present 7 areas where in my experience Crowd2Fund excels, 7 areas where they have room to grown and 7 areas where they simply must do better.
What I like
- Crows2Fund represents an excellent ‘power in your hands’ platform. Although new investment opportunities are limited, they change frequently. This prevents the platform from becoming overwhelming; especially for new investors. Compare this to starting on the stock market, where investment options are nearly limitless; and so too are the investment pitfalls.
- If you you need to get your money out of the IFISA due to personal circumstance, the exchange is where you head. As with the rest of the platform, you control your own destiny. The % return rate that you set on the sale is up to you. The more favourable the % rate to the buyer, the quicker the sale will likely be, but the lower your return/higher the capital loss depending upon where in the loan life-cycle you are selling.
- New investors can use the exchange to quickly build a diversified portfolio. If the current ‘opportunities’ are too sector specific, the exchange allows you to buy into now closed historic opportunities.
Caveat emptor: The exchange can also include people trying to sell defaulted and distressed debt. Ensure that you do your homework before buying.
- The platform has a repayments calendar that offers a great visual overview of when your investments should pay out. There is usually a couple of days lag before Crowd2Fund credits your account with the payment however. Once you get a feel for the repayment process, you can use this to gain an understanding for how often you need to log-in and re-invest repayments.
- On calling their main contact number, the phone was answered quickly – and by a human being.
- The site is attractive, clean and functional.
- The on-line platform help section is concise and of good quality.
What needs improvement
- The number of new opportunities remains rather low. They do turn-over as the campaigns end, however Crowd2Fund often pad them out with “success stories”. This is designed to hide the fact that there are only 5 new opportunities as of writing.
- You can add investment opportunities to a ‘watch list’ via an icon on each opportunity page. Additionally, anything that you invest in is automatically added to your ‘watch list’… however there is however no mechanism to view the watch list!
- The ‘Wallet’ section contains information that should be accessible via ‘My Investments’. For example. the repayments calendar and ledgers are both found under ‘Wallet’, which seems unintuitive.
- The ‘My Investments’ sections use of investment stats and figures is confusing and misses key information. If you hold exchange investments this is further exacerbated. Here, the numbers and percentages are tied-up in knots between the original debt issuance price and your exchange purchase price. The lack of visible explanations for what the terms/figures mean makes it unnecessarily difficult for new investors.
Additionally, simple metrics such as ‘Year-to-Date (YTD) return’ and ‘Total return’ are missing. Equally the ‘Average APR’ is not intuitive for most people, making the section unfriendly for new-investors.After punching their data into Microsoft Money 2005. I can see that my YTD return is between 7.3% and 12.8%. My Total return between 2.3% and 3.8%* and that my first £1,000 invested currently has a portfolio value of £1,022.23. None of this is visible on the Crowd2Fund user interface!
Isn’t this want you expect to see?
- Finished campaign pages should transition into investors news and feedback pages. This would help to strengthen investor/business links and foster a community. The transposition of new company accounts and a once per-year paragraph on progress by the business owner/directors would not be too much to ask.
- You must state the sectors that interest you when setting up your profile, yet there is currently no way to filter/restrict new ‘opportunities’ or the ‘exchange’ based on sector/interests.
- Minor UI and navigation issues (e.g. none of the sub-navigation links under ‘Profile’ work as intended It is impossible to setup ‘Smart-invest profiles’ because the link doesn’t work.
* I have been on the platform 6 months, but not had £1,000 fully invested for 6 months. I have also added additional capital which is skewing the figures.
What I don’t like
- After 6-months on the platform. I have noticed that investment opportunities tend to bias towards retail. That is okay if you want to support British retail, but with the threat of an economic downturn on the horizon it negatively exposes the platform to unnecessary risk. For the small investor, the lack of diversity prevents the creation of a properly spread portfolio. Increasing risk.
- Despite having auto re-invest disabled (and being unable to configure it). Their system managed to auto-invest my balance into 7 opportunities – 3 of which had dreadful credit ratings. Most were not in sectors that I would have invested into e.g. retail. After 4.5 anxious hours, my promised call back had not occurred and it took a second phone call to resolve my seemingly forgotten issue.
In fairness, Crowd2Fund did reverse the transactions without any further quarrel. Yet an apology wasn’t overly forthcoming!
- There isn’t an investors community. The social and community aspects of the platform feel like they could benefit from more open investor relationships. An investor community could also help to keep the Crowd2Fund financial analysts on their toes, provide more pressure to fix some of the areas needing improvement and become a resource in attracting new opportunities.
- Seeing lists of unanswered questions on campaign pages lets the platform down. The contract should require businesses answer questions in a reasonable time-frame.
- As of writing they have not updated their bad debt and default rate statistics since 31st May 2019. It should be updated at a minimum each quarter.
- The fact that I do not have to log-in every time I visit their site. If I (or a malicious agent using my computer) open their page after a week of inactivity. It should not log me in, show my balance and allow execution of trades!
PCI / the FCA really should have picked up on this!
- There is still no Android app (only iOS).
When I signed up with Crowd2Fund I was sceptical about the concept of peer-to-peer lending. The higher potential for returns compared to Ratesetter was ultimately what led me to pick Crowd2Fund. In the 6 months that have followed, despite a few issues with their system. The platform does exactly what it set out to do and, for the most part it does it well.
There is room for improvement, however it is clear that the platform is slowly evolving along with Crows2Fund as an organisation. One of the stated ambitions of Crowd2Fund’s own equity issue (via their own platform) is to spend nearly £400,000 in further developing that platform. So it seems likely that they are aware of many of these problems and looking to the next 12 months to solve them.
The proof is ultimately not in the look of the site, but in the diligence of their financial analysts in picking safe investment opportunities. Since signing up and making my first trade. I have had no bad debt, no late repayments (beyond 10 days) and my current return is between 7.3% and 12.8% across 7 investments (after fees). This works out at 8.8% in total.
I feel that this is a respectable figure while also allowing me to create a diverse investment portfolio without incurring the high fees/capital gains tax structures of the stock market. Best of all, it sits beneath the warm tax-free embrace of an ISA. It is easy to see why making 8.8% in 6-months is far better a prospect than the 0.75% one might expect from a Cash ISA.
For more information on Crowd2Fund or to create a free account on the platform please visit www.crowd2fund.com.