What is Crowdlending in Accounting?

Crowdlending is a form of peer-to-peer (P2P) lending where private individuals or investors lend money directly to businesses or individuals through digital platforms, without going through traditional financial institutions such as banks. From an accounting perspective, crowdlending entails specific requirements for accounting , documentation and tax treatment that Norwegian businesses must comply with under the Norwegian Accounting Act .

What is Crowdlending?

Crowdlending, also known as peer-to-peer lending or P2P lending , is a form of financing where many small investors collectively lend money to borrowers through a digital platform. This differs from traditional crowdfunding in that it always involves a commitment to repay with interest.

Main characteristics of Crowdlending

• Direct lending: Investors lend directly to borrowers without the intermediary role of the bank
• Interest-based returns: Investors receive interest as compensation for risk
• Platform-based: Transactions take place through specialized digital platforms
• Diversification: Investors can spread risk by lending to many borrowers
• Shorter process: Faster processing than traditional bank loans

Crowdlending from the Borrower's Perspective

For companies that receive funding through crowdlending, this is treated as long-term debt in the accounts. This differs from equity-based crowdfunding where the funds are treated as share capital .

Accounting for Borrower

Transaction type	Debit	Credit	Accounting period
Receipt of loan	Bank/Bank deposits	Long-term debt	Upon payment
Interest payment	Interest expense	Bank	Ongoing (monthly/quarterly)
Installment payment	Long-term debt	Bank	According to the repayment plan
Accrual of interest	Interest expense	Costs incurred	At the end of the accounting period

Practical Example: Crowdlending for Business

A company receives NOK 1,000,000 through crowdlending with 8% annual interest and a 5-year repayment period:

Upon receipt of the loan:

 Debet: Bank 1.000.000
 Kredit: Langsiktig gjeld 1.000.000

Monthly interest payment (8% annually = approx. 6,667 NOK/month):

 Debet: Rentekostnad 6.667
 Kredit: Bank 6.667

Annual installment payment (200,000 NOK):

 Debet: Langsiktig gjeld 200.000
 Kredit: Bank 200.000
 

Crowdlending from the Lender's Perspective

For private investors or companies lending money through crowdlending platforms, this is treated as financial fixed assets or short-term receivables depending on the maturity.

Accounting for Lender

For private investors: * Interest income is taxable as capital income. *Loans losses may be deductible as capital losses * Must be reported in the tax return under "Interest and dividends"

For companies that lend: * Loans are recorded as receivables in the balance sheet. * Interest income is recognized as income on an ongoing basis. * Loss provisions must be assessed at the end of the financial year.

Lender type	Accounting processing	Tax treatment	VAT processing
Private person	No accounting obligation	Capital income (taxable)	Excluding VAT
Sole proprietorship	Receivable/Interest income	Business income	Excluding VAT
Joint stock company	Financial fixed assets	Business income	Excluding VAT

Risk Management and Loss Provisions

Crowdlending involves credit risk , and both lenders and platforms must have systems in place to manage this risk in accounting terms.

Loss provisions for Lenders

According to accounting standards, lenders must assess expected credit losses and make provisions:

• Individual provisions: For loans with identified default risk
• Group-based provisions: For portfolios of loans based on historical loss experience
• Periodic assessment: Minimum at each financial close

Practical Example: Loss Provision

A company has lent NOK 500,000 through crowdlending and estimates that 5% of the portfolio may default:

 Debet: Tap på fordringer 25.000
 Kredit: Avsetning for tap 25.000

Tax Consequences

The tax treatment of crowdlending depends on whether you are a lender or borrower, and your organizational form.

For Borrowers (Companies)

• Interest costs: Fully deductible as an operating expense
• Loan amount: Non-taxable income (debt)
• Fees: Platform costs are tax deductible

For Lenders

Private investors: * Interest income: Taxed as capital income (22% tax rate) * Losses on loans: Deductible as capital losses * Platform fees: Can be deducted from interest income

Companies as lenders: * Interest income: Taxed as ordinary business income. * Losses on loans: Deductible as an operating expense * Provisions: Tax deduction when losses are realized

Legal Requirements and Regulation

Crowdlending in Norway is regulated by several laws and regulatory authorities to protect both lenders and borrowers.

Financial Supervisory Authority Regulation

• Platform license: Crowdlending platforms must have permission from Finanstilsynet.
• Capital requirements: Platforms must meet specific capital requirements
• Reporting: Regular reporting to supervisory authorities
• Investor protection: Information and risk disclosure requirements

Consumer protection

• Information obligation: Platforms must provide clear information about risks
• Right of withdrawal: Limited right of withdrawal for private investors
• Maximum limits: Limits on how much private individuals can invest
• Risk classification: Loans must be classified by risk level

Bookkeeping and Documentation

All crowdlending transactions must be documented in accordance with accounting regulations :

Required Documentation

• Loan agreements: Complete agreements with all terms and conditions
• Platform Reports: Monthly/quarterly reports from platform
• Payment voucher: Documentation of all receipts and payments
• Interest Earnings: Detailed overview of interest income/expenses
• Loss reports: Documentation of defaulted loans

Storage requirements

According to the Accounting Act, all documentation must be kept for a minimum of 5 years from the end of the financial year.

Crowdlending vs Other forms of financing

To understand crowdlending's place in the financing landscape, it is useful to compare it with other alternatives:

Financing method	Equity/Debt	Repayment obligation	Accounting processing	Typical cost
Crowdlending	Debt	Yes, with interest	Long-term debt	5-15% annual interest rate
Bank loan	Debt	Yes, with interest	Long-term debt	3-8% annual interest rate
Crowdfunding	Varies	Depends on type	Varies	5-10% platform fee
Equity	Equity	No	Share capital	Ownership share
Factoring	Debt	Yes	Short-term debt	1-3% of invoice amount

Accounting in Practice

Monthly Routines

For companies that use crowdlending, the following routines should be established:

1. Interest expense: Record monthly interest expense based on outstanding balance
2. Installments: Record installment payments as a reduction in debt
3. Platform fees: Cost-effective ongoing platform fees
4. Reconciliation: Reconcile balances against platform reports

Annual Routines

• Loss provisions: Assess the need for provisions for losses
• Accrual: Ensure correct accrual of interest
• Classification: Consider whether debt should be classified as short-term or long-term
• Note disclosures: Provide adequate note disclosures in the annual accounts

Future Developments

The crowdlending market in Norway is developing rapidly, and several factors will affect the accounting treatment:

Technological Developments

• Automation: Increased automation of accounting through API integrations
• Blockchain: Potential for blockchain-based lending platforms
• AI and risk assessment: Better risk models for loss provisions

Regulatory Changes

• EU regulation: Harmonization of crowdlending regulation in the EU
• Tax changes: Potential changes in taxation of crowdlending
• Accounting standards: Updates in accounting standards for financial instruments

Conclusion

Crowdlending represents an important form of financing that requires a thorough understanding of accounting and tax consequences. For borrowers, it involves treatment as long-term debt with ongoing interest costs, while lenders must manage receivables, interest income and credit risk.

Key points for successful crowdlending accounting:

• Correct classification: Ensure correct treatment as a debt/receivable
• Ongoing follow-up: Establish routines for monthly accounting
• Risk management: Assessing and providing for potential losses
• Documentation: Maintain complete documentation according to legal requirements
• Tax optimization: Utilizing deduction opportunities and understanding tax consequences

By following established accounting principles and staying up to date on regulatory changes, both businesses and investors can benefit from crowdlending as an efficient form of financing while meeting all accounting and legal requirements.

For businesses considering crowdlending as a financing option, it is recommended to consult with an accountant or auditor to ensure proper implementation of accounting procedures and compliance with all relevant regulations.