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Crowdfunding explained: The Ultimate Guide to Crowdfunding

This type of debt-based crowdfunding is characterised by individuals or institutional investors providing secured or unsecured loans to a company. The loans are usually only covered by a personal guarantee and generally have a wide range of interest rates, depending on the purpose, compared to 100% collateralised loans. This distinction points to a fundamental difference between the ‘crowd funding’, whereby investors acting like investors seeking an economic return and investment, where investors are either in a charitable project to support or a non-monetary reward. For example, are you looking for passive income or are you willing to spend time on your investments? What is the time horizon of your investments? And how much predictability do you prefer in your cash flow? Some platforms offer you the opportunity to invest as much as 1 Euro in each project, while others have very high minimum investments. The first and most fundamental is that invoices are sold for immediate payment to directly improve the company’s working capital. It usually refers to public online calls to contribute to the financing of specific projects.”

The US for companies, being able to sell this invoice with a discount to get the money right away helps equalize the company’s liquidity while someone else carries the liquidity fluctuations. The main difference between equity crowdfunding and the more traditional ways of attracting equity funds is that equity is offered to a wide range of potential investors through an open call on a crowdfunding platform. The main difference between traditional real estate financing and real estate shares crowdfunding is that crowdfunding is done online with the platform used to facilitate the process.

Facebook, Instagram, or Twitter, together with the crowd-funding platform, social media platforms, such as Facebook, Instagram or Twitter and use it for their projects directly to the market to a much wider audience of potential investors.

Many investors have used the crowdfunding of real estate as an alternative method of investing in real estate deals that would not be available without an online platform. Compared to P2P business loans that are usually dependent on a company’s assets to generate income, P2P consumer lending depends on one person or family income.

You can read more about P2P consumer lending in our article Consumer Crowdling: from Niche to mass market.
P2P business loans

P2P business lending is also known as market place business lending and business crowdling. This is also the explanation for the very high interest rates you will find in some P2P real estate loans projects.

You can read more about P2P, the real Estate loan in our article, The Ultimate Guide To real estate Crowdfunding, with examples that are both fault-based real estate crowdfunding platforms, and equity real estate crowdfunding platform.
Invoice Trading

Invoicing trading, invoicing financing, financing of receivables and invoice writing are all general terms used to describe the type of debt-based crowdfunding by which individuals or institutional investors purchase invoices or bills to be received from a company at a discount. The main features of which blockchain to kredietverleningsproces should be able to add a greater trust in the form of improved transparency, data integrity, and onveranderbaarheid of the data, as well as a greater degree of devolution, in the form of greater privacy, reliability, and versatility.

There are few platforms left to use the blockchain technology in their lending process, but there are some interesting uses that you can read in our article Blockchain and P2P Lending: a practical guide for investors and borrowers.
Debt-based Crowdfunding

Pro:

Stable cash flow & revenues: it is easier to predict compared to crowdequity.
Less risk: instead of buying part of a business, borrowing money is usually less risk, borrowing with a crowd opens up to wider diversification.
Short investment period: the duration of the loans is clearly indicated, so you know how long the investment will run if the loan is paid on time.

Disadvantage:

Return is limited: you know exactly what interest you are going to get paid when the loan is repaid in full.

If we look at the different regions around the world, donation-based crowdfunding is good for the next part of the total funds raised with crowdfunding.:

1.6% of the European crowdfunding market
1,5% of Asia-Pacific market without China
0.7% of UK crowdfunding market
0.7% of the US crowdfunding market
0,0% of the Chinese crowdfunding market

How Does Crowdfunding Work?

In order for a crowdfunding transaction to happen, we need at least three parties.:

Financing providers: Crowdfunding includes several agents who usually have no connection, except for the project being financed. Also because many crowdfunding platforms offer secondary markets, the difference between a debt guarantee and a loan agreement is unclear, why we prefer the wider maturity of debt-based crowdfunding to a term that is directed exclusively at loans.

As the crowdfunding market develops rapidly and in many cases is characterised by rapid integration of new technologies, most categories of crowdfunding are provisional and new ones are regularly added. interest payments, property in the company or a finished product), or an intangible reward (for example, to avoid con artists, make sure you do your homework before supporting a project.

Donation-based Crowdfunding is the smallest of the four main types of crowdfunding and according to the most recent global data available on the crowdfunding market, donation-based crowdfunding represents only 0.03% of the funds raised in the world with crowdfunding. Especially when an investment ends badly, good customer service is essential. Based on the rights of financiers in the specific project or enterprise, crowdfunding can be divided into four global crowdfunding models illustrated in the figure below.

These crowdfunding models with subtypes will be further explained in the section “Crowdfunding models: the main types of Crowdfunding” that you will find later in the article.
Towards a definition of Crowdfunding

Because of the many different crowdfunding models and the rapid development of industry, the definitions of crowdfunding are often limited and so far no comprehensive definition of crowdfunding has been agreed in industry. A large number of financiers are involved in the financing (crowd); 2. A shareholder with a partial right of ownership is entitled to a profit which could arise if the company succeeds in its business plan. In return, the platform will usually charge a fee. You should therefore search for platforms that are willing to address how your investments will be handled in the event of either platform bankruptcy, loan originator bankruptcy, default on loans, or in the event that an investment in shares underperformes or fails. It is also useful to distinguish between platforms with a direct investment structure and platforms with an indirect investment structure.

As in more traditional ways of investing, risk and return will always be balanced, so do not get carried away by platforms that promise extraordinary or unrealistic high returns.
4 prepare for the worst before it happens

What happens if a crowdfunding platform goes bankrupt? Or an investment that’s not performing well? Debt-based crowdfunding and Share-Based crowdfunding have the potential to generate high returns, but as mentioned above, with a high expected return comes high risk. In order to compensate for their financial risk, crowdfunders may receive either tangible remuneration (e.g. here, according to figures derived from reports from the Cambridge Centre for Alternative Finance (CCAF), debt-based crowdfunding models form the following part of the total resources raised by crowdfunding.:

99,7% of the Chinese crowdfunding market
93.3% of the US crowdfunding market
89.8% of the UK crowdfunding market
83.5% of Asia and the Pacific without China
79.1% of the European crowdfunding market

Below we will briefly describe the main types of debt-based crowdfunding with suggestions for further reading. More about this below.
Start-Up Capital Crowdfunding

If you are looking to invest in start-up and early business, but not about the funds as a business angel or have access to venture capital, startup equity crowdfunding can be an interesting option.

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