Last month, we profiled debt crowdfunding, a form of crowdfunding that allows individuals to lend capital for the sake of earning a return through interest and loan repayments. For entrepreneurs, debt crowdfunding is considered a plausible substitute for the traditional bank loan. For investors, debt crowdfunding seems semi low-risk compared to equity crowdfunding. This is because the investment’s term-length and expected return is substantially less. Similarly, the fixed interest rate is an excellent way for investors to bring stability and diversity to their portfolios.
How Debt Crowdfunding Works
For entrepreneurs and startups interested in debt crowdfunding, the process is similar to that of an equity campaign, including the basic rules of promotion, marketing, and planning. The only difference, however, is the loan listing, an element which may replace or complement the business plan. Essentially, a loan listing acts as an application — it provides information on the desired size and type of loan. When selecting a size, understand that the lower the amount, the more likely it is to be funded.
When narrating a backstory in your listing, include a variety of personal details that illustrate your ability to cover monthly payments. Specify your intentions with the money here as well. Creditworthiness comes into play during the application process, so research your credit report prior to submitting a loan listing. Check for any errors or inaccuracies that may hurt your overall score. Depending on the project you are trying to fund, innovation may compensate for lack of positive financial history. In saying this, many portals assign interest rates based-off of an applicant’s credit score.
Once the portal approves the loan listing, the campaign begins. Approach the next few weeks as you would an ordinary equity project. Browse our article archives for further tips, tricks, and advice in this respect. Once enough investors reach out and the campaign closes, the borrower is expected to begin repaying this debt almost immediately. Unlike rewards-based campaigns, the loan goal is the project’s cut-off point, so forget about stretch goals!
What to Look for in a Portal
Pioneer debt crowdfunding portals like Prosper and Lending Club have many protocols in place to review both investor and entrepreneur applications. As such websites continue to grow month-over-month (Look at Lending Club’s recent statistics), more portals will likely pop-up, so keep your eyes peeled for ones you like.
When looking for a portal, there are a few key things to consider: Lender verification and rating systems, valuation services, types of loans offered, quality of investors and projects currently hosted on the site, successes and reviews, tax reporting systems, and many other operational policies including fees and regulations.
As with all forms of crowdfunding, practice good judgement in selecting a portal and conduct enough research to know the lender audience before engaging. Please share your experiences below!
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