There are now roughly 2,500 unique crowdfunding platforms.
The options for startups trying to raise money have never been this vast. Some crowdfunding platforms are getting creative with the kind of funding they are targeting.
There has been a recent influx of platforms that allow startups to crowdfund debt. This allows founders to unlock some of the benefits of crowdfunding without ever giving up equity.
To begin, let’s take a quick look at what debt crowdfunding actually is.
A Quick Background
Until recently crowdfunding (outside of reward crowdfunding) was not allowed.
Then, in 2012, the ‘JOBS’ act (Jumpstarting Our Business Startups) was passed. This legislation allowed for community solicited crowdfunding as long as it passed through an SEC-regulated online platform.
This change in the law launched the explosive crowdfunding platform growth we have seen crescendo in the past few years. With the emergence of all these platforms, equity crowdfunding soon took center stage.
However, it appears that the snowball would contain to roll.
Alternative crowdfunding is elbowing its way past the giant banks and huge equity crowdfunding platforms. In the next few years, it appears that this trend will only continue to explode.
One of these more niche crowdfunding methods is debt.
What is Debt Crowdfunding?
Debt Crowdfunding is a method of raising funds for business activities by issuing debt instruments to investors, through an online platform. The platform is responsible for getting approval and registering with the SEC. It is also the platform’s responsibility to vet all the businesses that apply to raise debt using their service. This protects the investor from fraud.
Essentially, this mechanism allows anyone with $100, to invest in businesses they care about and expect a 5-12% return on their investment within a given amount of time.
The beauty of debt crowdfunding is that it can be a very efficient way to get money from a large number of people quickly. This type of crowdfunding is especially well-suited for companies with a proven track record and an established customer base.
When done correctly, debt crowdfunding can provide startups with the resources they need to scale their business without giving up equity or control.
For these micro investors, it means that they can find and invest in companies that are right up the road, instead of being limited to trading shares on the public market.
Why Banks are Scared (And Should Be)
Because of how the crowdfunding platforms are regulated, they end up behaving a lot like a traditional back debt loan.
Banks hate this because it isn’t their money. It’s the public’s.
The banks currently work as a bit of a middle man already for these transactions. They assume the risk and lend out their clients money in order to receive interest from those loans.
Debt crowdfunding cuts the traditional bank out of this transaction. It allows for the individual to assume the risk, becoming less liquid, in exchange for far greater interest rates than the banks provide.
This is obviously an oversimplified view, but the point is clear. Instead of putting money in the bank, people can make a riskier play for more return, and put it into a local business if they wish.
For the startup, the terms of a bank loan and a crowdfunded one are most likely very similar. However, when choosing between them, crowdfunding offers the advantage of marketing. Primarily, anyone who invests will automatically become an ambassador for the brand. This can make a huge difference for any startup, but especially for those that are local.
This is huge news for the startup world. It expands the options for obtaining debt to scale a business and helps create an army of ambassadors that have a real stake in seeing a business succeed.
Debt crowdfunding platforms
These platforms have started popping up faster than I keep track of… That being said, here are a few of my favorites:
The SMBX focuses on local businesses in your area. I love the idea of being able to invest in a company that is in my community.
This platform works by offering bonds to investors for as little as $10 apiece. The principle for those are paid back monthly at the time of activation and usually payout 7-9% return over 3-5 years.
This platform does a great of communicating what the expected return on investment will be monthly, and for how long.
Honeycomb focuses on people.
Its formatting is very similar to The SMBX but it all feels a bit more human. They also specialize in local loans that serve as crowdfunded debt for small businesses.
Honeycomb has some new businesses on its rosters, but many are more well-established local businesses looking to scale. The interest rates are generally a little higher, but the offering is more diverse.
Mainvest does a variety of different investment types. One way they differentiate is by allowing for some revenue-based investing. That allows the investor to get paid back a certain return, based on the business’s monthly revenue.
Mainvest does a great job of presenting the data for each company clearly. They feel a bit more corporate than the previous two on this list.
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Debt crowdfunding is a viable option for small businesses to obtain the resources they need in order to grow. This type of crowdfunding allows startups to avoid giving up equity or control, and instead focus on building their business. Additionally, debt crowdfunding provides micro investors with opportunities to invest in businesses that are right up the road, rather than being limited to trading shares on the public market.
This is a huge step for both the startup and micro investor communities.
Best of luck out there,
JP
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