Crowdfunding is a loan from lots of people (the crowd) managed by a company in the middle. The managing company will carry out some due diligence and may require security before the proposition is presented to the crowd for funding. The company ends up with thousands of loans for small amounts (e.g. £10) in order to make up the full funding requirement. The management company collects the interest and capital (at the end of the loan) and distributes it to the crowd during the term of the loan.
Internet companies have been creating an automated process for combining these small sums, calculating and then allocating interest payments. Lenders benefit because their loan is divided between many recipients so if any recipient fails, they do not lose their whole loan. Since running the internet market place for lenders and borrowers is considerably cheaper than running a bank, fees are lower. This translates into lower interest rates for borrowers and higher returns for lenders.
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