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Blog

Debt Crowdfunding Explained

Mihir Gandhi

Debt crowdfunding offers an opportunity for small businesses, including startups, to explore peer-to-peer loans without jumping through the hoops required for possible bank financing (often only to be turned down) that also come with high interest rates.  

How to Qualify
There are wealthy investors willing to offer loans at interest rates below what a bank would charge.  In some cases, they’ll make private loans that the bankers wouldn’t make.  There are still qualifications you’ll have to meet, however. You will still need to demonstrate creditworthiness, though the threshold will differ from the banks and will vary platform to platform, and creditworthiness isn’t the only factor at play in obtaining debt crowdfunding.  

Investors
There is some evidence to suggest that investors actually prefer debt-based crowdfunding to other platforms, with a recent survey showing more than 75 per cent of the funds invested going to debt-based crowdfunding sites. These numbers indicate that investors like the certainty of having their initial outlay repaid, with interest representing a small return.

How It Works
There are many lending portals up and running in North America, and they all have different processes and requirements. Expect some common elements, of course, and be ready to outline the purpose of the funds you’re looking for and how much, your credit profile and financial situation. Beyond that, there’s a lot of variety, so do your research on which ones best suit your circumstances, and then ensure you meet the portal’s specific required criteria before you start submitting your application.  Generally, you present your case for a loan online and investors decide whether they want to invest.

Promotion
Social presence is still a key factor in debt-crowdfunding, so promotion is still important. Market research will help you identify which channels you should focus on in order to attract attention from the right investors and/or consumers, if that applies.

Debt Crowdfunding History
Early forms of debt crowdfunding include microlending and microfinance, which have been around for a long time typically as a way to lend small amounts to low-income individuals that can help raise them out of poverty.  In the last decade, thanks to the Internet, debt crowdfunding has gained considerable widespread traction. The first microlending website, kiva.org, appeared in 2005. In 2006, Prosper.com was the first to launch a peer-to-peer lending site in the U.S.  LendingClub.com followed shortly thereafter in 2007, and this alternative funding method continues to gain in popularity.

Future
Ever since the passage of the JOBS Act, lending portals and crowdfunding sites have exploded in popularity.  It seem as if there are a few new sites popping up each week.  It’s an exciting world out there and investors are funding deals.  So what are you waiting for?  Get your deal listed!