Those who are interested in real estate investment may view debt crowdfunding as a viable (and likely promising) option. Crowdfunding is related to funds pooling from a group of people.
The idea is to allow these people to collect money to help fund (or finance) a project or a business. Because the money comes from a group of people, each of them doesn’t have to ‘donate’ a lot of money.
In real estate, this kind of crowdfunding type is also possible – and it exists. The idea is that the promoter (the person who owns the project or has the idea) would post about their projects in the crowdfunding platform. Those who are interested in joining can then send their money to help fund the project.
Those who want to start a real estate business (most likely buy a property and then manage it to get profits and earnings) can use this crowdfunding concept to collect the money. That’s why this crowdfunding activity is considered ideal for those who don’t actually have a lot of money, but still want to invest and earn extra income.
If you are the promoter, you can start the business right away from the collected money. But if you are the investors, you can expect extra income from your investment.
Debt Crowdfunding Concept
Debt crowdfunding is basically about the investors (or the crowd) that lends their money (or the capital) to a business for an exchange of repayment and also interest over time.
It is viewed as the alternative option to get capital, especially for small business, without them having to give up their company’s ownership. Plus, this action can also provide incentive or encouragement for the communities so they can get involved.
Let’s not forget that starting a (small) business needs capital. Even maintaining one needs capital too. In most cases, self funding isn’t exactly the ideal option. Business startups may have various options, such as SBA (Small Business Administration) guaranteed loans, venture capital, or traditional business loans.
However, the (debt) crowdfunding is favorable because not only it’s considered more convenient, but it’s also simpler than having the regular business loan. It also comes with lower interest rates, more favorable terms, simpler application process, and faster approval times.
However, if you want to be able to repay the loan on a timely manner, you need to have a predictable cash flow. And because it involves a group of people, it’s often viewed similar to real estate syndication, but the entire concept is quite different.
Debt Crowdfunding vs Equity Crowdfunding
You probably don’t know this, but debt crowdfunding is only one type of the known crowdfunding types. There are 4 types of them out there, and debt crowdfunding is often compared to equity crowdfunding.
As it was mentioned before, debt crowdfunding is about small businesses starting out their operation by getting financial help WITHOUT them sharing or giving up the ownership of the business. So, in debt crowdfunding, you lend out money and then they will have to repay you back with interest.
In equity crowdfunding, on the other hand, you can have the business’ ownership; like buying the share of the company. When you send the money, you are basically buying a part of the business, and you get a dividend (a type of earning generated from share or bond or stock) as a part of your investment.
As you can see, they are both different: in concept, in implementation and practice, and in how you earn your money.
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Besides the debt and equity crowdfunding, there are also two other types out there:
- Reward crowdfunding. Investors will get rewards for the exchange of their investment. Those rewards can be in the form of service or product
- Donation crowdfunding. Investors give out money without expecting anything in return. This is usually done for social cause or charity, such as raising money for disaster, and such thing alike.
The debt crowdfunding loans generally have their own unique features, such as:
- The loan amount can go up to $500,000
- The campaign’s length can be for weeks to months
- The repayment time is usually done monthly, covering at least 6 months up to 5 years
- The loan APR usually ranges from 5% to 27%
Debt Crowdfunding Types
The debt crowdfunding itself can be divided into several different types:
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- Peer to Peer (P2P) lending. In this type, the businesses would be ‘matched’ to the potential investors to ensure healthy return. The amount of the loan can reach $500,000
- Micro lending. It has the same idea and concept as P2P lending, but with smaller amount – usually less than $50,000. The businesses are typically small and distressed businesses within the underserved communities.
- Invoice financing. This type enables small business to borrow capital against the debt that is owed by their customers. With revolving credit line, businesses can have a control over the cash flow.
- Mini bonds. This type usually has 3 to 5 years of term. The businesses need to make regular payment of interest to the investors within those time periods. And then, they must return the principal loan when the term ends.
Whether you are interested in starting a business or investing in one, you need to know that you have different options. Ask yourself whether debt crowdfunding is the right one for you, and then proceed from there.