Debt Based Crowdfunding


Debt Based Crowdfunding

For businesses looking to borrow money, debt crowdfunding, also known as peer-to-peer lending or loan-based financing, is a viable option. To put it simply, it is the same process as the old paradigm of asking for a business loan from a financial institution. The most significant difference is that the money is raised through a crowdfunding or peer-to-peer lending platform, and the funds are provided by a large number of investors. It can be appealing to firms looking for an alternative lending route, particularly those who have been unable to raise finance through traditional lending channels such as banks or credit unions.

When it comes to investors, the appeal can be found in the income that regular capital and interest repayments on their loan commitment can provide, as well as the awareness that they are making a contribution to the development of an idea, product, or business in which they have faith.

How it works:

For the vast majority of established businesses and, in a few instances, for startup companies, debt crowdfunding is an appropriate financing option for them. Companies outline the requirements of their loan (such as the amount sought, business objectives, and loan purposes) in a pitch and submit their financials to a crowdfunding or peer-to-peer lending platform in order to raise funds or receive loans from other businesses or individuals. When determining and defining loan terms, the platform will conduct due diligence and background credit checks on investors to determine and define factors such as the lowest investment limit, investor profile suitability, any other details and terms, and even the annual percentage rate of loan repayment.

The amount of money the company is attempting to raise will almost always necessitate the provision of security, such as business assets or a personal guarantee, depending on the size of the transaction.

Later, the crowdfunding platform makes the opportunity known to investors through its website and other online channels, after which lending is made available to those who qualify. It is expected that all of the money raised will be held in a separate account until the entire amount has been raised by the crowdfunding website.

Depending on the platform used, the exact terms – for both lenders and borrowers – will differ. However, in most cases, loan repayments will begin within a month or two of the company receiving financial assistance. An online dashboard on the crowdfunding website will allow investors to keep track of the progress of the various loan investments they make through the platform, in addition to other features.

Major Risks:

With debt-based crowdfunding, the rules of the game are slightly different; all of the risks associated with crowdfunding are still present, but the repayment of loans is the primary concern. It is possible that an investor would be well advised to consider the top three risks associated with debt-based crowdfunding when making a decision. The following are the major risks of debt crowdfunding.

• Default Risk

• Inflation Risk

• Interest Rate Risk         

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