Debt crowdfunding serves as an alternative source of capital for small businesses without giving up ownership of their company and provides incentives for communities to get involved. Find out why small businesses benefit from debt crowdfunding.
Debt Crowdfunding for Small Businesses
As loan rates continue to rise, collateral required to obtain loans increases, and credit scores continue to peak, debt crowdfunding is becoming a more viable option for these small businesses. Those looking for capital growth or expansion. Let’s take a closer look at what debt crowdfunding is, how it works and the types of businesses that can benefit from getting their community involved in the campaign.
What is debt crowdfunding?
Debt crowdfunding occurs when a number of investors (aka the crowd) lend money to early-stage businesses or individuals through a formal platform. Loan crowdfunding provides an alternative to traditional bank loans, often with more favorable terms, lower interest rates, faster approval times, and easier application processes. So how is it different from other types of crowdfunding?
Equity crowdfunding gives investors partial ownership of a company if they invest in an equity crowdfunding campaign. Debt crowdfunding is similar to debt in that investors receive payments on a fixed schedule along with interest.
Reward crowdfunding offers investors a reward, such as early access to the product the business is trying to develop, and no future returns. Debt crowdfunding can include rewards in addition to payments over time.
Determine your need
Before we get into the types of debt crowdfunding that you can use to get capital for your business, it’s important to determine what you need. The best way to do this is with a financial estimate. This will give you an idea of how much money you need and how much capital your business can provide. You should also determine how long it will take to pay off the loan, the interest rate on the loan crowdfunding offer, what initial fees there are (if any), and what you will charge your investors in exchange for the loan. what do you want Not sure where to start? Main vest’s Financial Projections Builder guides you through the questions and creates a financial projection tailored to your business.
Types of Debt Crowdfunding
There are several types of debt crowdfunding, all of which benefit the borrower and investor in different ways.
Invoice financing allows small businesses to borrow against their customers’ debts. Instead of affecting relationships with customers, invoice financing gives business owners a way to obtain a revolving line of credit that covers unpaid invoices and regain control of their cash flow. That being said, many small businesses may not have a significant amount of unpaid invoices which means this type of debt crowdfunding will not allow for growth.
Often used to support non-profit organizations or underserved communities.
Microloans are where individuals issue loans directly to borrowers. According to the US Small Business Administration A microloan is less than $50,000. Although many microloan organizations, such as Kiva. Provide much smaller loans.
P2P lending or peer-to-peer lending is similar to micro-lending in that potential investors match borrowers looking to raise capital. A major difference is that the amounts are usually larger than microloans, and P2P loans often go beyond helping people who need the services of an. Individual or company in need of capital.
How Debt Crowdfunding Works
Debt crowdfunding is. Relatively easy and. Usually easier than getting a loan from a bank. Below, we outline the process to get a bird’s eye view of how debt investing works. From making the initial offer or solicitation to interest payments.
- A potential borrower makes a. Proposal to a crowdlending. Platform viz. Invest.
- The platform then performs a number of checks to decide. The suitability of the add-on for your website. These checks often vary depending on the regulations surrounding the specific funding portal that each offer goes through. For example, here at Main vest. We file offers with the SEC and Finra but to ensure that each offer is a viable investment solicitation.
- If the Offer is selected for launch on the Platform. The. Platform will offer the Borrower’s rate of return and applicable fees that are commensurate with the. Risk level of the Offer. Key Investments differentiates itself by allowing. Borrowers to set their own repayment terms and. We only charge fees if the offer meets its objective.
- The offer is launched on the platform with a round amount and. Time frame. Once launched, investors can choose the amount they want to invest.
- After the time expires. And the money is released to the borrower, the offer is closed. If the offering reaches its goal. Investors will start receiving payments in the coming months.
Why debt crowdfunding is perfect for small businesses
Beyond providing an easier. More affordable way to get capital. To start up or. Grow. The community value of debt. Crowdfunding is unmatched. Unlike reward. Crowdfunding, where investors are only rewarded for their money, debt crowdfunding provides an investment opportunity for the. Borrower’s community to invest in if the business succeeds. The money. Can be repaid. With interest. In turn. This allows investors to share in the success of the business they support.
If you’re a small business and. Interested. In accessing. Capital. With the support. Of your community. Click. here to get started.
If you are an investor interested. In supporting small. Businesses. Click here to. Start investing.