Debt Vs Equity Crowdfunding

Let’s say you’re a small business. You’re doing great, you’re turning a profit, but the bank just won’t give you the loan you need to expand the business. Does this sound like you? Well, the good news is that there are two alternative finance routes you can go down – debt crowdfunding and equity crowdfunding. Both ways allow you to gain access to funds, but each with different long-term consequences. Which type of crowdfunding suits your business best? Here are the pros and cons of both debt and equity crowdfunding to help you decide.

Debt crowdfunding

If you aren’t familiar with debt crowdfunding, also known as Peer-to-Peer (P2P) Lending, it allows you to gain access to funds from an online platform that has a pool of investors ready to invest in your business. Investors lend a fixed sum of money over a period of time to the business and they earn interest. Ideally, debt crowdfunding is great for a single purpose over a select period of time, such as entry to a new market. If your business has been around for a couple of years, and you have assets and enough cash flow to make repayments, debt crowdfunding could be for you.

Pros	Cons
Once your loan is repaid with interest, you have no further obligations to the lender. In the case of equity crowdfunding, you are obligated to share future earnings with your investors. Application processing time is relatively shorter in comparison to equity crowdfunding. You retain full ownership and control of your business since the investor does not claim equity in the company.	If your business can’t repay its debts on time, you may be forced to liquidate assets or shut down your business altogether. You could be held personally responsible for repayment of the loan if your business is unable to repay the loan.

Equity crowdfunding

Similar to debt crowdfunding, a pool of investors come together via an online platform to invest in your business. Multiple investors pay the business for a small stake of the company. Investors make returns by either receiving dividends, profits, or shares.

Pros	Cons
The investor assumes all the risks. If your business fails, you don’t have to pay the money back. A deal with well-connected investors often comes with other benefits such as access to new business contacts.	You must share a certain amount of ownership. You won’t have the freedom to make decisions regarding your business without the investors’ approval. You may not agree with the way they want to run your company. The only way to regain full control of your company is to buy out your investors, which will require you to pay them more than they originally gave you.

Which type of crowdfunding should you choose? If your business is established and you’re looking for a loan, consider debt crowdfunding. At Funding Societies, we offer financing options to SMEs that might not meet traditional banks’ requirements. Read more: Why Businesses Should Not Be Reluctant to Talk About Debt