How to Choose a Crowdfunding Platform?

When choosing a crowdfunding platform, it is not enough to compare only the returns offered or ease of use. Different options may vary in the nature of the projects financed, their assessment procedures, risk management measures, and investment conditions. For this reason, before choosing the right platform, it is recommended to evaluate several key criteria, which we will discuss in more detail in this article.

What Is a Crowdfunding Platform?

Crowdfunding – is a method of financing in which the required amount is raised from many different investors. Most often, the entire process takes place online. Crowdfunding platforms are used for this purpose - online spaces where businesses or project owners seeking financing can raise funds from investors. Platforms act as intermediaries: they select and assess projects seeking financing, provide investors with information about them, and enable investments to be made. They also allow investors to review the projects on offer in one place and choose which options to finance.

Key Criteria When Choosing a Crowdfunding Platform

There is no single crowdfunding platform that is suitable for every investor. The best choice depends on the return being sought, the level of risk a person is prepared to take, and the types of projects they are interested in. Below, we present the most important criteria that are recommended to be evaluated when choosing a crowdfunding platform.

Platform Licence and Regulation

When choosing a crowdfunding platform, it is important first to check whether it is authorised to provide these services and is supervised by the responsible authority. In Lithuania, since 10 November 2023, crowdfunding services may only be provided by companies holding the relevant licence. Their activities are subject to EU requirements relating to the provision of information to investors, the management of conflicts of interest, and investor protection. If you choose a platform operating in Lithuania, information about its licence can be checked in the list of crowdfunding service providers published by the Bank of Lithuania. Service providers licensed in other EU countries can be found in the register of the European Securities and Markets Authority (ESMA). It is not recommended to rely solely on a statement on the platform’s website that it holds a licence - it is safer to check whether the company is actually included in the official register.

Types of Projects Financed

Crowdfunding platforms differ in terms of the types of projects they most commonly offer for financing. For example, some may be more focused on real estate projects, while others focus on business development in various sectors. The investment method itself also often differs: under EU regulation, crowdfunding platforms may be used to grant a loan to a project or to invest in securities issued by the project owner. Therefore, before choosing a platform, it is important to review the variety and nature of the projects offered and assess whether they match your investment objectives.

Project Selection and Assessment Process

When choosing a crowdfunding platform, it is also important to find out how projects seeking financing are selected. Platforms are required to publicly provide information about the selection criteria they apply, allowing investors to assess for themselves what requirements are imposed on financing recipients and how thoroughly their proposals are reviewed. However, the fact that a project has been listed on a particular platform should not be regarded as a guarantee of its reliability. Before investing, it is important to review the project description, its owners and their financial plans separately, and to pay attention to the stated risk factors. The Bank of Lithuania recommends investing smaller amounts in several projects rather than a large amount in a single project. This helps diversify risk.

Investment Security and Risk Management Measures

Various risk mitigation measures may be applied to crowdfunding projects, such as the mortgaging of real estate. For this reason, before investing, it is important to check whether a particular investment is secured in any way and, if so, under what conditions. If a loan is secured by real estate, it is advisable to pay attention not only to its stated value, but also to the loan-to-value ratio (LTV), as well as the ranking of the mortgage. For example, a first-ranking mortgage means that the claims of the first-ranking mortgage creditor would be satisfied first from the value of the mortgaged property, while a second-ranking mortgage provides a weaker position if the value of the property is insufficient to cover all obligations.

It is important to emphasise that even the mortgaging of property or other risk management measures do not guarantee that an investor will recover all of their money. If the project owner fails to meet their obligations, the security may be used to cover the debt, but its value is not always sufficient to recover the entire amount invested.

Delayed and Problematic Projects

When choosing a crowdfunding platform, it is important to find out in advance how it acts when a financing recipient begins to delay fulfilling their obligations. How quickly are investors informed about the delay? How often are they provided with updates on the situation? What actions are taken to recover the debt? Depending on the specific project and the terms of the agreement, negotiations may take place to amend the payment schedule, debt recovery may be initiated, legal action may be taken, or mortgaged property may be realised. Therefore, before investing, it is important to review the platform’s established procedures and assess whether they clearly specify what happens when payment delays occur and who represents investors’ interests in the recovery process. Platforms that act as intermediaries in granting loans are required to publish project default rates for at least the previous 36 months, so this can provide additional information. It is recommended to compare not only the return offered, but also the proportion of financed projects that have experienced serious payment difficulties.

Platform Track Record and Transparency

A platform’s track record helps to better understand how everything works not only in theory, but also under real conditions. The more information that can be found about previously financed projects, their progress, and problems that have arisen, the easier it is to assess how a crowdfunding platform handles more difficult situations. Publicly available information about the business model, applicable fees, risks, project assessment, and 3 previous results also enables investors to make informed decisions. In addition, the quality of a platform’s operations is also reflected in its communication with investors - especially when a project is delayed or encounters problems.

Minimum Investments, Terms, and Fees

Before choosing the right platform, it is also important to compare the practical investment conditions. One of these is the minimum amount that may be allocated to a single project. The lower it is, the easier it will be to distribute your available capital across different investments. It is also important to assess the financing term, which determines how long the invested funds may be unavailable. In addition, all fees applicable to the investor should be checked. These may be related not only to the investment itself, but also to other platform services, so it is important to consider more than just the stated interest rate.

Investment Diversification Opportunities

When choosing a crowdfunding platform, it is worth assessing whether it offers enough different investment options so that funds do not have to be concentrated in only a few projects. What matters is not only the number of projects, but also their diversity. If different businesses are seeking financing, projects are carried out in different sectors or markets, and their terms and risk levels vary, it is easier for an investor to build a more diversified portfolio. Simply investing in several projects does not necessarily mean good risk diversification if all of them are linked to the same financing recipient, sector of activity, or similar economic circumstances.

How to Compare Different Crowdfunding Platforms

When comparing different crowdfunding platforms, it is best to look not at a single indicator, but at the overall set of conditions. The most convenient approach is to assess the same criteria for each platform - this makes it easier to see how they actually differ and which one better matches your investment objectives. The table below will help you understand more quickly how to compare different crowdfunding platforms:

Most Common Mistakes When Choosing a Crowdfunding Platform

• Choosing a crowdfunding platform solely on the basis of the return offered. A higher potential return is generally associated with higher risk, so the interest rate alone is not sufficient for making a decision.
• Failing to assess whether the platform is licensed and supervised. Before investing, it is important to check whether the chosen platform is authorised to provide crowdfunding services and is included in official registers.
• Failing to find out how projects seeking financing are selected. If an investor does not know what requirements are applied to financing recipients, it is more difficult to understand the level of risk they are taking.
• Failing to find out what happens when a project begins to experience delays. It is important to know in advance how the platform informs investors, what actions it takes, and how debt recovery or similar processes are organised.
• Ignoring fees and other investment conditions. The minimum investment amount, project term, repayment procedure, or applicable fees have a significant impact on whether a particular offer is suitable for an investor at all.
• Allocating too much money to a single project. If a large proportion of the amount being invested is allocated to only one project, potential losses will be considerably greater if that project fails. Risk can be reduced by distributing funds across several different projects.

Popular Crowdfunding Platforms

Crowdfunding platforms may focus on different types of projects. For this reason, before choosing the right option, it is important to understand where investors’ funds are directed and how returns are generated. Several examples of popular crowdfunding platforms are discussed in the table below:

Why Might Profitus Be a Suitable Choice of Crowdfunding Platform?

Profitus may be a suitable choice for those looking for a crowdfunding platform in Lithuania for several key reasons. First of all, UAB “Profitus Crowdfunding” holds a crowdfunding service provider licence issued by the Bank of Lithuania, which authorises it to act as an intermediary in granting loans. The platform itself finances business projects secured by real estate. Before a project is presented to investors, the financing recipient’s creditworthiness and reputation, the proposed security measures, the value of the mortgaged real estate, and other indicators are assessed, and the project is assigned a risk rating. Investing can be started from as little as EUR 100, making it a suitable choice also for those who do not want to allocate a large amount immediately. A lower minimum investment also provides more opportunities to distribute available funds across several projects. For those who want to partially automate their investing, the RoboInvest function is also available, which allocates funds according to a pre-selected strategy.