While debt crowdfunding is often referred to as Peer 2 Peer (P2P) or marketplace lending. I also think it’s fair to say that different platforms like to create their own unique terms for debt-based crowdfunding. However, whatever the term the process is still the same.
In this article I will use the term debt crowdfunding.
What is debt crowdfunding?
So first of all lets start, by reviewing the articles in this crowdfunding series. So far I have discussed rewards and equity . In this article together we will discuss debt crowdfunding. So let’s start by discussing what is debt based crowdfunding. Well it’s where investors lend money to businesses in return for capital and interest repayment.
Consequently, over the years debt crowdfunding has grown in popularity since the banks cut back on their lending to small businesses. This was reinforced by tighter lending controls which resulted in more and more business owners being turned down by the more traditional lenders.
Noteworthy, business owners started to seek out alternative ways to raise funds to grow their business. Hence, recent research from the government-owned British Business Bank shows that the total value of peer-to-peer business lending across the UK rose by 51% to almost £1.8 billion in 2017. The government is keen to protect and support peer to peer lending.
How does it work!
Well I must admit as long at you fit the chosen providers which we will get into later. The process is very simple you just have the follow five steps.
- Complete the application form
- The application will then be assessed by the platform
- On meeting the criteria, a credit rate, A+ – C+ will be allocated
- The opportunity will then be placed on the market place.
- Investors will compete to finance the loan
Most platforms will promote the opportunity for just one day. One thing to be aware of is that interest rates will be determined by market forces. Which means the more popular your opportunity is the more investors you will get who want to invest.
Noteworthy, this will result in a better interest rate for your business, as more investors outbid each other in the marketplace.
So, you think debt crowdfunding could be just what your business needs. Right! well first you need to make sure you understand the key requirements if you are going to be successful with your initial application.
I think it’s fair to say that debt crowdfunding does not have the same strict requirements set by a more traditional source.
However, you will still have to pass some eligibility checks.
Noteworthy some marketplaces will require business owners to demonstrate profitability. Also, they may require specific legal entities such as limited company, limited liability partnership, partnerships and sole traders.
For those of my readers that know me, you will have already heard me say. First of all do not underestimate the time required to prepare. Also, make sure you have a compelling business plan with a comprehensive strategy for growth. This will include detailed financial analysis and projections.
Remember your goal is to make it EASY for investors to say YES.
Marketplaces are predominantly run by companies that want to make profit. They use the marketplace to bring together investors and borrowers. Once your application has been submitted they will accept or decline your request.
If you are accepted they will assess your credit risk, set a credit rating and determine the interest rate to the opportunity.
How do marketplaces make money
Well the first thing you need to be aware of they will charge you are fee for their service.
Fees will vary depending on the marketplace that you choose, and the term of the loan.
For example, let’s take FundingCrowd, how much could you borrow.
- Limited company or a limited liability partnership – £5,000 to £500,000
- Sole trader or partnership – £25,001 to £500,000
One thing with FundingCrowd they give you the option to add the fees to the loan.
Loan term 1 – 5 years and fees
- 6 to 18 months 2%
- 24 to 36 months 3%
- 48 to 60 months 4%
Finally, here at WendyKipling.com I pride myself on sourcing and partnering with some of the leading names in Debt Crowdfunding. First, if you decide to complete an expression of interest form for a selected partner. I will personally complete an initial review of your business proposal.
As part of my service to clients I offer a pre screening of your application, based on the eligibility criteria. Followed by submission and negotiation service with the chosen provider.
Furthermore, should your business be selected as a client I will provide the mentioned service free of charge.