We’ve heard of crowdfunding; we’ve heard of equity crowdfunding; what about debt crowdfunding?
In the way that many small companies seek non-IPO routes to raising equity, there are also companies that look for non-bank solutions to raising capital. For companies such as real estate groups where debt can be readily collateralized, debt crowdfunding can be a promising solution. And for companies that may need a combination of equity and debt financing, that is possible, as well.
Like equity crowdfunding, debt crowdfunding raises can be open to both accredited and non-accredited investors, depending on the structure of the offering. For companies in industries where banks are hesitant or unable to provide financing, these companies can now access the pool of public capital. There is also potential to transact at better interests rates than traditionally available.
For investors, there are benefits offered from debt crowdfunding that are not afforded by equity raises. Debt investors receive cash flow from recurring interest and loan repayments, where equity crowdfunding investors face liquidity and growth constraints before seeing a return on investment. And debt crowdfunding investments may be less risky for investors. While the upside for return in equity crowdfunding far outweighs that of its debt counterpart, the availability of collateral allows debt investors to recoup capital in the event of a default. Furthermore, if debt crowdfunding raises are structured with convertible instruments, debt investors can see that equity upside, as well.