In the second in our series on crowdfunding we’re focusing on debt crowdfunding, also called Peer to Business lending.
Typically lenders are looking to finance tangible assets that they can secure, such as book debts, vehicles or plant & machinery. However all too often businesses want to finance business growth which might involve business development, staff or simply working capital. The banks have largely withdrawn from such funding unless security can be provided. As a result there is an explosion of crowdfunding with most models based on loans.
In the debt crowdfunding model most loans are based on compounding interest with equal monthly repayments for the duration of the loan which is normally for between 2 and 5 years.
According to Nicola Horlick, chief executive of Money&Co, writing in CityAM in April 2015, debt crowdfunding is the source of funding for the vast majority of UK SMEs. She argues that this type of crowdfunding is less risky than equity crowdfunding because of the high failure rate of start-ups, whereas a debt funder like herself will ask for several years of made-up accounts.
Funding Circle is probably the best known debt crowdfunder in UK. It has loaned about £750 million to 7,300 businesses in UK and US. Examples include Blood & Sand who borrowed £104,000 in October 2014 from 100s of individual lenders to refurbish their new cocktail bar in London.
Given the risks, such loans are not much cheaper than those from a bank but they tend to be easier to obtain. However despite the perception of an easy loan, most funding platforms rely on directors giving a personal guarantee so as to make sure that they have every intention of repaying the loan.