Not that long ago, there was a lot of noise and some clarity about the concept of crowdfunding, which is using technology to aggregate the funds of donors/lenders/investors for a specific recipient/business.
During that period, I tried to be part of the clarity by writing several articles about the three different kinds of crowdfunding, which are: contribution fundraising, business lending and investment acquisition. Today I want to revisit the lending model, with some new information.
Crowdfunding lending is like the traditional kind in that a request for funds comes with the promise of repayment with interest over a specific term. Proceeds for a bank loan comes from depositors; with crowdfunding, the cash comes from investors. But unlike the bank loan, crowdfunding lending is conducted almost exclusively online. Individuals use crowdfunding loans, but our focus here is for business borrowing.
It’s important to report that the term crowdfunding is now more widely referred to as FinTech, because the interface process, from borrower introduction and debt service, to return of capital for investors is conducted on a digital platform. At the heart of the purpose of this article is that regardless of the funding source – crowdfunding or traditional – interest and terms on small business loans are always higher and tighter than for any other business sector. Almost by definition, a small business loan is a high-risk decision, for two primary reasons: