Early-phase companies usually cannot meet the criteria of classical bank lending: companies with an innovative business model cannot satisfy or struggle to meet the conditions of the standardized review process and without collateral the companies are not bankable. However, all these problems can be solved by alternative finance.
Crowdfunding is an important element of the optimal financing mix, enabling market validation and the collection of feedback even in an early stage, thus contributing to the further development of the product or service as well as securing further funding.
Our blogpost summarizes the latest results of the research of Fraunhofer Institut, one of the largest European research institutes, as well as the article of Paul Pöltner, founder of the Austrian equity-based crowdfunding platform Conda.

Co-financing with reward-based crowdfunding

The backers of reward-based crowdfunding campaigns receive gifts or the product itself at a later point in time. A successful crowdfunding campaign validates the demand for the product or service in an early phase and it might also help the company receive further (bank) financing. Fraunhofer Institut distinguishes three models of such financing:

1. Independent co-financing: The company is granted a loan after the review process of the bank, irrespective of conducting a crowdfunding round. Crowdfunding provides the company with additional funds and also has an important role in raising awareness for the company and strengthening the brand. The two funding rounds are completed independently.
2. Contingent co-financing: raising a certain amount by crowdfunding within a given period is prerequisite for receiving bank loans. The campaign serves the purpose of market validation: secures the credit institution of significant demand for the solution of the company, which implies that the company will be able to pay the loan back in the future.
3. Leveraged co-financing: in this case a successful crowdfunding campaign is a prerequisite for extending an existing loan facility. The campaign serves the purposes of market validation and provides additional information to the bank, which eases risk assessment.

Numerous examples prove the success of the combination of reward-based crowdfunding and bank lending.
In Germany the credit institution of Baden-Württemberg was the first to establish a joint microfinance program with the platform Startnext in 2017. The initiative was followed next year by similar programs of the investment bank of Berlin and the Infrastructure Bank of Hessen. These programs combined crowdfunding with microcredits up to the amount of 25,000 euros. The banks dispensed with collateral but set a minimum number of backers and a minimum sum to achieve as a condition of disbursing the loan. As an ancillary service, banks provided access to their funding and advisory networks. The program stimulated significant interest: more than 430 requests have been registered in Baden-Württemberg in 2018.
BNP Paribas established a similar cooperation with the French platform Ulule. Following the first projects in 2013, BNP Paribas supported the continuation of the program by investing 5 million euros in the platform. Following a successful crowdfunding campaign the companies can take out a loan in the value of up to 50,000 euros. Participating companies receive free banking service for one year as well as personal consultations for three years.

Co-financing with equity-based crowdfunding

Investors of equity-based crowdfunding campaigns receive shares of the campaign initiator company in exchange for their investment through the platform, in the hope of future returns if the company becomes successful. Fraunhofer Institut distinguishes four models of combining equity-based crowdfunding with bank lending:
1. Pre-co-financing: since the majority of early-phase companies are not bankable, it might be a good solution to secure the required own contribution by crowdfunding. The bank might support the company by providing other services such as incubation or mentoring, thus increasing the chance for the company to become successful and receive traditional (bank) financing.
In 2017 the German GLS Bank and CrowdDesk launched the first bank-backed equity-based crowdfunding platform in Europe, with the aim to finance sustainable projects. The projects are reviewed by GLS Bank and the suitable projects are routed to the platform to raise funds from the crowd.

2. Contingent co-financing: In this model the credit institution provides a loan to the company only if its crowdfunding campaign succeeds. The investment of crowd investors serves the purpose of validation and eases the risk assessment on the bank’s side.
A good example for contingent co-financing is the collaboration between Nordea Bank and the Finnish equity-based crowdfunding platform, Invesdor. The bank may provide a loan to the applying companies only after they raised a certain amount via their crowdfunding campaign. Both parties benefit from such a collaboration: the platform gains new clients by the bank’s referral program, while the clients conducting a successful crowdfunding campaign on the platform mitigate the risks of the bank.

3. Bank-sided structured co-financing: This model is based on the assumption that crowd investors are willing to take higher risks than the credit institution and to provide subordinate financing to the company, in hope of receiving a higher return on their investment. This type of funding secures enough collateral for the company to take out a classical loan.
The German platform Deutsche Crowdinvest established a co-financing program with the savings bank of Saarbrücken in 2018. The program mitigates the risk of high-risk loans by involving co-financiers through the platform. The investors provide the company with subordinated loans in the hope of attractive returns.
4. Crowd-sided structured co-financing: In this model the credit institution provides subordinate financing to the company. In this way the crowd investors take lower risks and expect to receive lower return on their investment.