What is Debt Crowdfunding?

While general crowdfunding refers to donation-based financing, debt crowdfunding occurs when a group of investors fund a business and the lender is required to pay back the loan with interest. This situation resembles a private loan from several parties pooling their money into one investment with which they expect will give them a return.

How Debt Crowdfunding Works

A business will apply for debt crowdfunding using an approved debt platform and submit the request with the loan amount desired. The group of investors will review the business and the application to determine if the loan can be funded. Factors that influence debt crowdfunding are predictable cash flow, revenue history, and creditworthiness to ensure the loan will be repaid.

Types of Debt Crowdfunding

The main types of debt crowdfunding are peer-to-peer (P2P), microlending, and invoice factoring. P2P lending is a common type of crowdfunding that allows businesses to borrow from other individuals without involving banks or financial institutions. Microlending refers to smaller amounts of money lended from individuals or other businesses. Invoice factoring is the process of selling (or factoring) a portion of a business’s invoices to a factoring company in exchange for capital.

Benefits of Debt Crowdfunding

The benefit of debt crowdfunding is that they are usually easier to obtain than a traditional bank loan. Receiving amounts from multiple investors allows