In a business world where traditional lending options are tight, interest rates are rising and online finance is booming, it’s little wonder that loan-based crowdfunding has emerged as a realistic funding option for small- and medium-sized businesses (SMBs).
The concept derives from the people-powered crowdfunding phenomenon that took the web by storm in the late 1990s and helped give rise to platforms like Kickstarter.
Built on the simple concept of internet users chipping in to turn an innovative business idea into reality, the power of crowdfunding has become mainstream, and today has even made a splash in the food and beverage industry – proving especially successful for those with savvy marketing skills. Consider the example of one individual who used entertaining video clips to raise over $55,000 in his quest to make potato salad.
An industry valued at almost $1 billion in the US alone by 2020, crowdfunding is largely responsible for innovations as famed as the Oculus VR headset and the Peloton machine, and possibly many more innovations to come – the industry is predicted to grow at an annual rate of 4.9% up until 2028, according to research firm Million Insights (see chart below).
Today, crowdfunding is also playing a big part in the emerging world of blockchain technology.
Block.one, a blockchain solution provider, is one of the biggest crowdfunding projects of all time, raising an incredible $4 billion by 2018, even without a live product.
Such initiatives contribute to an industry that’s now a viable funding option for many startups, offering people with big ideas and little finance a proven way to put themselves on the map.
The concept has also spawned several offshoots, of which lending-based crowdfunding is one.But what is this system of finance, and how can it benefit SMBs struggling to break the financial stranglehold over their business?
Struggling to secure finance for your business in a challenging lending market? Sign up to Duckfund and apply for a loan in less than a minute.
Lending- or loan-based crowdfunding varies slightly from the classic model of receiving donations for a business idea.
Instead, entrepreneurs raise funds in the form of loans that they pay back to the lenders with an agreed interest rate.
Typically spread over a period of several weeks, they serve as a quick funding option for SMB owners who need more solid finance options than casual donors, and don’t want to give up a share of their business like with an equity-based crowdfunding initiative.
The lending-based model also differs from rewards-based crowdfunding in that the SMB doesn’t need to offer perks or special privileges in exchange for funds.
They simply raise finance for their venture via their website or crowdfunding platform, providing assurances that they will pay back the borrowed sum.
The success of crowdfunding loans has led to different versions appearing across the web, catering to a myriad of financial needs.For SMB owners, it’s worth spending time assessing each one so that they make the correct decision for themselves and their business.
Here are some of the most prominent types.
Peer-to-peer lending platforms work on a similar basis to online dating sites. It takes the needs and interests of both parties and uses an algorithm to match them.
P2P loans often stand out as a way of getting a business loan with no personal guarantee. Instead, platforms assign a personalized credit score to each applicant, and sometimes even provide security to smooth the wheels of the process.
Depending on what the borrower is looking for, they may get funds from a single investor, or a consortium.
While credit scores aren’t as relevant here as they are for traditional loans, the platform may still consider them when calculating interest rates.
Some key examples of this type of platform are Lending Club, the world’s largest P2P platform with revenue of almost $700 million in 2021, and UK-based Funding Circle, which has provided over $1 billion in finance.
Microlending works on a very similar basis to P2P finance, except it’s often used for marginalized or underserved communities.
The amounts tend to be smaller here, with the US Small Business Association lending $85 million through its microlending program in 2020 alone.
This type of finance tends to be much more common among sole traders than larger entities, who normally require much higher borrowed amounts.
SMBs often encounter cashflow difficulty due to 90-day payment terms with customers.
Invoice financing allows them to raise cash during this period by selling their unpaid invoices to a third-party lender.
Acting as a line of credit, financing of this kind allows SMBs to remain on good terms with their customers, however they opt to lose a percentage of revenue via commissions paid to the lender(s).
One of the main roadblocks of traditional lending is the waiting time for approval, which can make or break a small business.
Debt crowdfunding gets around this with quick go-aheads; SMBs normally receive a response within days thanks to the simple nature of the online platforms involved.
It’s also a useful way for the SMB to get its name out into the public domain.
To get acceptance, they need to present their product or service in an attractive light, which can peak the interest of a wide pool of potential consumers, as well as investors. In some cases, the application process itself can help create a buzz around the business and even help to build a community around it.
It also stands out from other equity- and rewards-based crowdfunding in that owners don’t need to offer a share of the business, or incentive, to secure funding; they just need to pass the lender’s criteria, which is often much less demanding than the conditions imposed by banks and traditional lenders.
If a borrower doesn’t like the terms offered by one lender, there are normally several less stringent alternatives to choose from.
Lending-based crowdfunding may be more charitable than banks when it comes to lending conditions, but applicants normally still need to show some kind of creditworthiness.
For very new businesses who haven’t had the chance to take on any form of credit, this might be problematic.
In these cases, lenders tend to set higher interest rates than usual to compensate for any risk concerned with providing money for unestablished startups. While still at a lower percentage than most bank loans, the final rate may still be a lot for small businesses to take on.
Lenders may also ask for business collateral, sometimes a struggle for startups, or a personal guarantee, which risks the seizure of private assets such as vehicles and property.
Even for established businesses, lending-based crowdfunding may not be the best option.
Taking out a loan unsuited to the business’s needs, based on incomplete data, often causes more problems than it solves.
The emerging world of blockchain technology brings a dazzling array of opportunities to the business landscape, including a virtual lending tool that promises to transform SMB funding.
Blockchain-based loans provide the speed, scope and flexibility of loan-based crowdfunding, without the demand to provide the creditworthiness that holds new SMBs back.
The concept is based around a non-fungible token, or NFT. Serving as the bill of exchange, the NFT allows the SMB to raise capital to secure the loan arrangement, which is then stored on the transparent and traceable public blockchain ledger until the debt is repaid.
Owing to its decentralized nature, the process gives both parties full autonomy and transparency over the agreement, making it simple to organize repayment planning, cut down on expensive banking and legal fees, and reduce risk (and interest rates) because the lender can now trace where the money is being spent.
Duckfund is one company that’s leading the way with this type of financing, funding SMBs and deep-tier suppliers who would normally be out-of-reach of traditional lenders.
Like crowdfunding platforms, Duckfund draws upon a wide range of potential financiers to find applicants the best option possible. These suppliers are familiar with the blockchain process and are able to provide funding in minimal time.
Duckfund uses an AI-powered scoring algorithm that increases approval rates by 1.5x by taking stock of business characteristics well beyond bank statements and credit scores.
We do this by working with the software companies you use (including popular marketing, sales, accounting, invoicing, CRM software) to analyze anonymous data that helps us understand what your business is really about and its true potential.
This process also decreases the risk for lenders, who get a fully-transparent picture of the companies they’re lending money to.
Once signed up, SMBs can quickly apply via an application process that takes less than a minute. They might get a pre-approved loan offer, potentially available within 48 hours, and they can add suppliers and buyers to unlock supply-chain financing.
By combining the very best aspects of crowdfunding with the latest blockchain technology, the Duckfund model aims to establish a new trend that could change the face of the business lending industry for years to come.
Duckfund and apply for a loan in less than a minute. If approved, you’ll get the funding you need within 24 hours.
