Debt Crowdfunding for Startups

Debt crowdfunding allows a group of lenders to lend funds to individuals or businesses in return for interest payment on top of capital repayments. Also known as Peer to peer lending or Peer to business lending. Borrowers must demonstrate creditworthiness and the capability to repay the debt, making it unsuitable for NINA (no income no asset) or startups.

Debt Crowdfunding vs Equity Crowdfunding Investments

Investment crowdfunding can be debt-based or equity-based, or can follow other models, including profit-sharing and hybrid models. The term equity crowdfunding is often used to describe crowd investing into both debt and equity based instruments when they are offered on an equity crowdfunding platform. The first known equity based crowdfunding platform for startups was launched as a private beta in June, 2009 by Grow VC Group followed by full commercial launch in February 2010 The first US. based company ProFounder launched model for startups to raise investments directly on the site in May 2011, but deciding later to shut down its business due regulatory reasons preventing them from continuing, having launched their model prior to JOBS Act. One of the first operational equity crowdfunding platforms in the USA was EquityNet, and other early platforms include CrowdCube and Seedrs in the UK.

Equity Raisers: Learn how to invest in startups!

Debt-based crowdfunding (also known as “peer to peer”, “P2P”, “marketplace lending”, or “crowdlending”) arose with the founding of Zopa in the UK in 2005 and in the US in 2006, with the launches of Lending Club and Prosper.com.

Borrowers apply online, generally for free, and their application is reviewed and verified by an automated system, which also determines the borrower’s credit risk and interest rate. Investors buy securities in a fund which makes the loans to individual borrowers or bundles of borrowers. Investors make money from interest on the unsecured loans; the system operators make money by taking a percentage of the loan and a loan servicing fee.

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