Crowdfund | What is Debt-Based Crowdfunding?
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What is Debt-Based Crowdfunding?

Debt-based crowdfunding is another form of crowdfunding that is gaining attraction. This model of crowdfunding involves requesting support and resources from other investors in exchange for interest.

Debt-based crowdfunding, which is also commonly referred to as “crowd lending”, has proven to be a great alternative for startups, because although it is similar to acquiring a traditional bank loan, but often with competitive and lower interest rates, with more flexibility and options to secure resources. It is a great opportunity for small business owners and startups to acquire financial support and resources outside of traditional lending forms, such as banks and credit unions.

How Does Debt-Based Crowdfunding Work?

From the perspective of an investor entering into debt crowdfunding, an investor receives shares for their investments, with the expectations that the organization or startup they are investing in will pay dividends on profit shares. Additionally, the startup may grow and develop over time to a point where an investor can sell those shares at a higher rate than when they were purchased.

In debt crowdfunding you are also investing in a security of the company (namely a debt instrument of some type) where your goal is to loan your money to the company with a fixed repayment term and the company pays you a specified interest rate during the term of the loan.

Investors can work with various debt instruments when entering into a debt-based crowdfunding agreement. Some instruments allow for entering into shares that relate to potential company growth whereas others are strictly interest-based. Additionally, there are secured and unsecured debt instruments. Interest rates are typically based on the level of risk associated with a particular startup or entity.

What is the Difference Between Equity and Debt Crowdfunding?

So what is the difference between equity and debt crowdfunding? Most often, equity and debt are looped into the same category. This is because they are regulated similarly, but, they are in fact different in order to ensure security to prevent fraud and scams.

What are the Risks?

Of course, however, with any form of crowdfunding, there are substantial risks to investors and startups alike. Investors may never see a return on their investments and startups may struggle to find an investor that’s willing to partner with them.

However, by working with a professional and experienced crowdfunding firm, the risks are not only identified at the beginning of a crowdfunding campaign, but they are also mitigated by working with a firm to spread out those investments over an interested market segment that is the best fit for the startup. This crowdfunding methodology is a great opportunity for startups and small businesses.

Working with a Crowdfunding Firm

Partnering with a crowdfunding firm can make all the difference for both investors and startups. Interests on both parties are protected to ensure maximum growth as well as a maximum return on investment. When working with an experienced crowdfunding firm, both parties can win.

  • Debt crowdfunding is more appropriate for the masses than equity crowdfunding. Although equity might get more crowd-friendly, I believe the near-term and mid-term promise for crowdfunding securities lies with debt.

  • debt crowdfunding, I believe is almost a foregone conclusion. This is also ironic since only about 4% of the 50 sites I looked at were debt crowdfunding sites (as opposed to 18% for equity crowdfunding).