Crowdestor buyback guarantee - how does it work?

Crowdestor is one of the top platforms I get asked about. I am not ready to do a full review yet, but let’s have a look at their BuyBack Guarantee - how does it work?

In most of Crowdestor projects you can see a message: “This loan comes with a Crowdestor buyback guarantee”:

In platforms like Mintos, Twino, Viainvest the idea behind a “buyback guarantee“ is very simple - if a loan is late, Loan Originator will buy it back and investor will get paid in full. It makes sense for short-term and consumer loans, but not for business or real estate loans.

As we have already seen in Kuetzal, Envestio, Monethera, Wisefund, TFG Crowd - platforms that offer business and real estate loans together with unbelievable buyback guarantees are most likely lying about their ability to provide them, and have many other red flags as well.

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Crowdestor BuyBack Fund

So what about Crowdestor? First, let’s find out - how does this guarantee work. If I visit About > BuyBack Fund, then following description is provided:

But these “Distribution Rules“ are not mentioned anywhere, so from website it is not possible to understand - what are the rules and what can investors expect if a project fails? The only thing that is clear - the Fund is quite small and in no way could cover 100% of failed projects. If all of the Fund would be spent on 1 failed project to compensate all investors, it might work if the project is less than EUR 320 000:

What do investors expect?

As I understand, these rules have been explained to some investors previously, but when I did a poll in Telegram group, it looked like at least half of investors have no idea what these rules are:

According to this poll - 40% of investors think that if a small project fails, then investors would get back 100% of their investment, and part of them think - that they would be compensated for lost interest as well.

What is the reality?

Well, I have good news and bad news:

1. Good news for everyone - if Crowdestor would promise a buyback guarantee that would cover 100% of losses for failed projects, then it would make no sense and I would suspect that the platform is a scam.

2. Bad news for the 40% of optimistic investors - if a small project would fail, “Crowdestor Buyback Guarantee“ would not cover 100% of principal, even if the BuyBack fund is 10 times bigger than project.

The correct answer in the poll is nr 2. - if a project fails and has no collateral, investors would get back maybe 1-2% of the money they invested.

The distribution rules are following:

O = Outstanding loans (count together all projects that have not been repaid yet)

F = Failed project size (how many EUR were lost?)

B = BuyBack Fund size (what is the total amount in the Fund at that moment?)

R = Returned EUR (how much EUR will be returned to all project investors?)

P = Returned % (how much % would get paid back from your investment?)

Formulas:

R = F / O * B

P = B / O * 100

Examples

Let’s take a look at some projects that have no collateral and could potentially go to zero. And let’s assume that they would both fail. Note that my numbers about outstanding loans and project size will be rough estimates as these are not available on website, but they will be quite close and would not change much even if they are later updated.

Outstanding loans = EUR 30 000 000

BuyBack Fund size = EUR 316 826

Mafia Stars

Amount raised so far: EUR 1 900 000 (2 projects, each EUR 950 000)

If this project would fail today, then:

R = 1900000 / 30000000 * 316826 = 20 065.64 EUR returned to all investors

P = 316826 / 30000000 * 100 = 1.056 %

From 1 000 EUR invested, investor would get back EUR 10,56

From 10 000 EUR invested, investor would get back EUR 105,60

WarHunt

Amount raised so far: EUR 750 000 (2 projects, EUR 500 000 + EUR 250 000)

If we assume that Mafia Stars has just failed and 20 065.64 EUR from BuyBack Fund was returned to investors, but also some other projects were repaid back successfully, for example, for total amount of EUR 3 000 000, then numbers would look like this:

BuyBack Fund size = 316826 - 20065.64 = 296 760.36 EUR

Outstanding Loans = 30000000 - 1 900 000 - 3 000 000 = 25 100 000 EUR

And if WarHunt would fail as well, then numbers would look like this:

R = 750000 / 25100000 * 296760.36 = 8 867.34 EUR returned to all investors

P = 296760.36 / 25100000 * 100 = 1.1823 %

From 1 000 EUR invested, investor would get back EUR 11.82

From 10 000 EUR invested, investor would get back EUR 118.23

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Key takeaways

1. Many investors have no idea how Crowdestor buyback guarantee works

2. If a project fails, the BuyBack Fund will pay back around 1-2% of investment

3. The naming “Buyback guarantee“ is misleading and should be changed

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