What is Debt Crowdfunding?

Debt crowdfunding is a way for businesses (usually SMEs) to borrow money from many individuals through a crowdfunding platform.

5 minute read
What is debt crowdfunding by Crowdbase

Debt Crowdfunding overview

Debt crowdfunding is a way for businesses to borrow money from many individuals through a crowdfunding platform. It is primarily used by later-stage startups and SMEs with at least a couple of years of financial history. Much like a bank, investors lend money to the business, expecting to receive it back with interest.

Debt Crowdfunding

Debt crowdfunding is considered a lower-risk investment when compared to other crowdfunding investment opportunities. The returns are usually predetermined (except in the case of options), following the agreed-upon repayment schedule. Therefore, you will know beforehand the exact payments you will receive unless the business goes bankrupt. Even if it does, debt investors (creditors or lenders) are the highest in seniority, meaning that they are the first ones to claim back their money from what is left over from the business.

Debt seniority pyramid and risk level per class
Debt and Equity seniority pyramid

How Debt Crowdfunding works

There are three parties involved in every debt crowdfunding transaction. See below who those parties are and what each one does.

  • Project Owner: As host of the campaign, the project owner is the entity seeking to borrow capital from investors. Once their campaign is live, they are responsible for investors’ queries about the company and transferring the securities to investors once the campaign is successfully completed. They must also carry out the investment objectives stated in the Key Investor Information Document on the campaign’s page.
  • Investors: As backers of the campaign, investors lend their capital to the project owner, expecting to receive it back with interest. Before investing, they can find all the information they need on the campaign’s page, as well as ask more questions directly to the project owner. After investing, they receive the appropriate documents regarding their ownership of debt securities, including repayment schedule and promised interest rate.
  • Platform: As a mediator, the platform is where project owners and investors come together. The platform acts as a neutral intermediary, facilitating the exchange of funds and debt ownership between project owners and investors. It is responsible for ensuring the quality and authenticity of investment opportunities and advertising available deals to the crowd. It also ensures that project owners’ and investors’ identities are verified, and all regulatory standards are followed. Lastly, the platform is also responsible for collecting the funds from investors and safekeeping them with a reputable financial institution.

How to invest in Debt Crowdfunding

Crowdbase offers individuals the chance to invest in revolutionary and exciting businesses and become their creditors. This can be done by following these easy steps:

  1. Create an account and complete the required identity verification process (it takes less than 10 minutes).
  2. Browse our roster of current investment opportunities and choose the ones that fit your liking.
  3. Decide on how much you want to invest in each campaign.
  4. Once the campaign is successfully completed, receive your certificate of debt security ownership.
  5. Get repaid on your investment with interest, provided the business does not go bankrupt.

Pros and Cons

Like investing in any other asset class, investing in debt crowdfunding comes with its own advantages and disadvantages. Before investing, you should thoroughly study all available resources on the campaign’s page, including potential benefits and risks.

Pros

  • Promises higher interest rates than what you would get from banks or savings accounts.
  • Receive regular capital and interest repayments with minimal investment.
  • Offers investors the opportunity to invest in businesses or ideas they resonate with and be part of their journey.
  • Relatively a low-risk investment, as the loan is shared among several investors and usually backed by business assets.
  • Easier for businesses to secure funding, fostering growth in the local economy
  • Allows businesses to raise capital without giving up ownership.

Cons

  • Does not offer additional returns if the business does exceptionally well.
  • Exposed to inflation risk, as debt raised through crowdfunding is usually not inflation-protected.
  • Might lose seniority ranking if the business raises additional, more senior debt.

Who should invest in Debt Crowdfunding?

As is the case with the other investment opportunities on our platform, anyone can invest in debt crowdfunding. Minimum and maximum investments may vary by campaign, but in most cases, you can invest from as little as €100! Debt crowdfunding is ideal for people who have spare money sitting in savings accounts. They can invest a portion of that and earn a decent interest instead of ~0% (and sometimes negative rates!). It is considered a relatively low-risk investment; however, it does have its own risks. Available resources on that are the KIID of each campaign, our blog and social media posts, our investment fundamentals course and FAQ section. If anything is still unclear or if you have more questions, we are here to help guide you all the way, so don’t hesitate to contact us!

Takeaways

Debt crowdfunding gives individuals the opportunity to invest in securities offering higher interest rates than banks and savings accounts. It is a relatively low-risk investment, as loans are usually backed by business assets. Additionally, it offers investors the opportunity to invest in socially impactful businesses without taking the additional risk of equity ownership. You can start earning interest on your hard-earned cash by investing from as little as €100!

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