About Debt-based Crowdfunding
We can't disagree the fact that crowdfunding has changed the way fundraising works. It is an innovative way to raise funds for your project. It is not a new concept, as crowdfunding is being practiced since centuries together by authors, scientists, and others alike, which gives the credibility to this type of fundraising.
There are many ways of fundraising and crowdfunding is one such way. Similarly, there are many methods of crowdfunding as well:
- Debt-based crowdfunding
- Charity based crowdfunding and more
What Is Debt-based Crowdfunding?
In simple terms, debt-based crowdfunding is the practice of raising funds from individuals, in return for interest. The person who supports your project by putting his money is known as an investor. In other words, debt-based crowdfunding is also called as "crowdlending."
Debt-based Crowdfunding For Startups
Debt-based crowdfunding has been proven one of the most effective ways to raise funds for startups. Although similar to a traditional bank loan, debt-based crowdfunding has got many more advantages when compared to bank loans. Startups can use it as an alternative if they think, approaching a VC, might be a tedious task.
Advantages Of Debt-based Crowdfunding For Startups
- It has competitive or less interest rate when compared to banks.
- It is more flexible than a traditional bank loan, which makes the repayment easy.
- Your brand, in turn, gets more reach among the masses.
- Your project becomes popular, and more and more people try to become a part of it.
- Easier than approaching VCs and affordable too!
These are the reasons why debt-based crowdfunding is increasingly becoming popular across the globe.
The Disadvantages Of Debt-based Crowdfunding
Everything has its own risks including debt-based crowdfunding. The most prominent disadvantage is the repayment of loans. The person whose idea is being crowdfunded has the obligation to repay the loan with interest borrowed from various individuals.
In the case of an old company which is having a regular inflow of cash and other sources of income, this should be an easy option. However, in the case of newly established projects, reward-based or donation-based crowdfunding would be a better option.
There have been many instances of debt-based crowdfunding being successful for newly launched initiatives as well. It all depends on your idea and how skilfully you execute it.
This is always mistaken for equity-based crowdfunding, which is why several people fail to understand the terms.
The Difference Between Equity-based Crowdfunding And Debt-based Crowdfunding
Equity crowdfunding is nothing but raising funds from individuals in return for an equity share in the company. In India, this is banned. In debt-based crowdfunding, investors get a degree of interest every month, rather than equity in the enterprise.
Rules Of Debt-based Crowdfunding:
Before starting your campaign, you must know the rules. SEBI (Securities and Exchange Board of India) was set up in the 1980s, and it is the market regulator which has laid down rules related to crowdfunding in India. Click here to read more about this topic.
Best Crowdfunding Sites In India:
You might have come across many crowdfunding sites while browsing about crowdfunding. Wonder which one to choose? Click here for the list of crowdfunding platforms in India.
Choose wisely depending on the needs of your campaign.