RISKS vs. MITIGATION MEASURES: Crowdfunding (loan)

Project Developers’ Perspective

RISKS

• Crowdfunding loans are less flexible than crowdfunding equity.
• Crowdfunding loans are challenging in the early project phases, when it is difficult to predict the project time component. Despite a possible delay in the project, the fixed interest rate must be paid in time.
• Another risk is the unclear result of the geothermal project. A well may be dry or less productive than planned and revenue might not be enough to pay the fixed interest rate of the loan.
• The loan has to be refinanced after the duration has expired.
• Community investors are less committed to a project as opposed to equity or reward-based methods.
• Reaching local people and thus increasing local acceptance might require additional social engagement tools.

MITIGATION MEASURES

• Equity or reward-based crowdfunding are typically more suited for the early geothermal project development phases.
• Investigate if the government will guarantee the loan to reduce the risks for the community.
• Raising funds through a convertible loan that can be converted into equity, if needed, could be another strategy to mitigate the risk.

Community Investors’ Perspective

RISKS

• If a project/company fails to repay its investment, normally, there is no guarantee fund for losses. This is the risk for investment. For the community investors this can mean that the loan may fold and cannot be repaid.
• With crowdfunding loans, the return is limited to the interest rate agreed in the loan agreement. If a project is above expectations, the return is thus still limited to the interest rates set out in the loan agreement, as opposed to shares that take the increased profits into account.
• Crowdfunding loan investors have no say in the project strategy.
• Most platforms ask for a fee for managing the loan for the community investors.

MITIGATION MEASURES

• Look for a governmental guarantee scheme. Some national governments and the European Commission via the European Investment Bank or the European Investment Fund provide guarantee funds that cover some of the losses in case of default (Kleverlaan 2020)[1].
  
• Ask for possible securities, e.g. collaterals provided by project developers, so alternative financing platforms have some value left if a company has to fold or cannot repay the loan.
• Choose the crowdfunding platform carefully and compare the individual terms and conditions.
• Some crowdfunding platforms offer private financial instruments to mitigate the financial risk for their community investors: they can for example keep a financial buffer of a few months of payments in a separate trust fund. This way the investors will also get a repayment when the company/project developer is missing one or two repayments on their loan.
• Some platforms use an own platform risk fund to mitigate the risks. In this case a small percentage from every crowdfunding deal is saved in a fund. This platform guarantee fund will pay investors when a company/project developer gets into default.