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What is debt crowdfunding and how does it work?

Posted 5 years ago

What is debt crowdfunding and how does it work?
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What is debt crowdfunding?

Debt crowdfunding, sometimes known as peer-to-peer lending or loan-based lending, is an alternative way for businesses to borrow money. In essence, it’s the same process as the traditional model of applying to a bank for a business loan. The chief difference is that the finance is raised via a crowdfunding or P2P lending website, and the funds are contributed by multiple investors. It can be attractive to businesses seeking an alternative lending route for businesses which have been unable to raise finance via banks or credit unions

For investors, the attraction can be the income that regular capital and interest repayments on their loan contribution can offer, and also in the knowledge that they are contributing to the journey of an idea, product or business they believe in.

How does debt crowdfunding work?  

Debt crowdfunding is suitable for most established businesses and, in a few instances, startups. Companies detail the requirements of their loan (amount sought, business objectives, purposes of the loan) in a pitch and submit their financials to a crowdfunding or peer-to-peer lending platform. The terms of the loan – lowest limit of investment, investor profile suitability, any other particulars and terms and APR of loan repayment - will be decided and defined by the platform as part of its due diligence and background credit checks. 

Depending on how much money is targeted, the company will usually be required to provide some security, in business assets or a personal guarantee.

The crowdfunding platform then publicises the opportunity to investors through its website and other online channels, and lending is opened. All money raised is held separately by the crowdfunding site until the full total is raised.

Precise terms – for lenders and for companies looking for loans – will vary from platform to platform, but by and large loan repayments will begin within a month or two of the company receiving its financing. Investors will have an online dashboard on the crowdfunding website where they can monitor the status of their various loan investments.


What are the risks of debt crowdfunding?

As with any investment opportunity, your money is always at risk and you should not invest it if you cannot afford to lose it. If a company cannot make its repayments or goes into liquidation, lenders may lose some or all of their investment. In the event of liquidation, crowd lenders are treated like any other lender and may or may not receive the proceeds from any assets sold by liquidators. But because loans are usually made against some form of security, it’s considered a lower-risk investment than equity crowdfunding, for instance.

Peer-to-peer lending and debt crowdfunding are also regulated by the UK Financial Conduct Authority (FCA) and investors have recourse to the financial ombudsman. Investors have a 14-day cooling-off period, during which time they can withdraw their offer. They don’t, however, have access to the Financial Services Compensation Scheme and while some platforms offer a secondary market to sell on loan investments, it’s not compulsory, can be a slow process and investors may not cash in as much money as they paid out initially.

As with all crowdfunding investments, you should do your due diligence, be sure that you understand the risks involved and the true post-tax value for money offered by the investment, and never invest more than you are comfortable losing entirely.

For the latest loan-based crowdfunding investment opportunities, search our marketplace here. If you are looking for a crowdfunded loan for your business, 

Tagged: business business loans debt crowdfunding debt crowd-funding crowdfunding equity equity crowdfunding business loans finance business finance start ups sme business growth

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