Posted On: 2022-06-14 17:47:39
Crowdfunding is a way to gather funds from a large number of individuals, and organizations. In India, crowdfunding is widely used for medical emergencies and business start-ups. There are a few types of crowdfunding like:
1. Equity-based crowdfunding
2. Debt-based crowdfunding or Peer-to-peer crowdfunding
3. Reward-based crowdfunding
4. Donation-based crowdfunding
All of these categories follow various techniques, but they all have the same goal: 'Raise Funds.'
What is debt crowdfunding and how does it work?
Similar to equity-based crowdfunding, debt-based crowdfunding, (also known as peer-to-peer lending or loan-based lending), is a means for businesses to borrow funds.
In debt crowdfunding, there are investors i.e the crowd that loan capital to a business in exchange for repayment of the principal amount and interest once the goal amount is accomplished.
The company that needs capital approaches a trustworthy crowdfunding platform to initiate a fundraising campaign. They put up the details such as the amount desired, the purpose, business objective on the crowdfunding platform.
As part of its proper research and background credit history, the platform decides and defines the terms of the loan, including the lowest investment limit, investor profile suitability, any additional particulars and terms, and the payback of the loan.
Advantages of Debt-crowdfunding
Debt crowdfunding is majorly opted by start-up founders. This crowdfunding type comes with several advantages and a few of them are:
1. Debt crowdfunding comes with less interest rates to pay compared to bank loans.
2. The brand that is supposed to be launched in the market has a wider scope and gets more reach among the crowd.
3. Bank loans come with long and time-consuming procedures and documentation. With debt crowdfunding, crowdfunding platforms work with the minimal procedure, digitally.
4. With less procedures comes more flexibility. Hence, repayment is easier compared to traditional bank loans.
5. Crowdfunding is one of the secured and flexible ways to gather the required capital. Hence, the time horizon can be stretched according to the founders' convenience.
Disadvantages of debt crowdfunding
1. Repayment of loans: As a business owner, the person who initiated the fundraiser will have to repay the principal amount along with interests to the investors; no matter how the business has been working or the start-up is growing.
If the business owner is not able to repay the debts then all the assets of the owner will be liquidated and shut down.
2. Limited access to other financial institutions: Once opted for debt crowdfunding, the chances for owners to approach other financing institutions are restricted. This is because huge debts in terms of interest accumulated influence credit ratings, which may "drive away" other possible investors the owner would like to approach next.
3. Inflation Risk: Due to rising inflation, the value of investments drops. This might affect the number of investors a debt crowdfunding campaign might get.
Rules of Debt Crowdfunding in India
The Securities Exchange Board of India (SEBI) is the regulator body which has laid down rules for crowdfunding in India. The rules specify that only an 'Accredited Investor' may invest in a crowdfunding project. This is for online debt crowdfunding. The rules for debt crowdfunding on grounds are more specified. Companies formed under the Companies Act with a minimum net worth of Rs 20 crore, High Net Worth Individuals (HNIs) with a minimum net worth of Rs 2 crore, and Eligible Retail Investors who meet the statutory conditions are all considered "Accredited Investors."
The Bottom Line...
Debt crowdfunding or peer-to-peer lending is widely used by business owners to raise loans or by start-up founders to raise the initial capital. These loans are repaid by them with an interest rate promised to the investors. In India, SEBI regulates and lays rules for crowdfunding. The individual or organization to initiate a campaign under debt crowdfunding has to follow the rules. These fundraisers on crowdfunding platforms are promoted through social media to reach more people.
Filaantro is an online crowdfunding platform that raises funds for all and every cause that one believes in. This also includes fundraising for start-up companies. The fundraising campaign is promoted on all the social media platforms like Instagram, Facebook, Twitter, and LinkedIn so it reaches the crowd widely and your cause gets more donors or investors.
Visit filaantro.org to know more.
Author: Anjali Patel
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