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, 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 investment, with the expectations that an organization or start up 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 a company ( namely a debt instrument of some type) where your goal is to loan your money to a 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.
DEBT CROWDFUNDING FOR BUSINESS AND REAL ESTATES
Easier access to patient capital is at least one of the boons promoted by the crowdfunding industry at large. Debt crowdfunding is already assisting business and real estates projects alike.Like its partner equity crowdfunding, debt crowdfunding expands the possibilities for many businesses looking to find a non-bank solution for sourcing the necessary capital. Because of its unique position and structure, debt crowdfunding is actually preferred by many investors who prefer the steady income available, have the ability to collateralize obligations and are able to capitalize on their investment immediately.