Debt-based Crowdfunding
- Apr 6, 2016
- 1 min read
Have you tried to get a bank loan lately? Credit has dried up for small borrowers since the financial crisis. Debt-based crowdfunding (peer-to-peer -P2P - lending has taken up some of the slack.
Debt-based crowdfunding first emerged as an investment vehicle in US and UK. Debt-based crowdfunding lets individual borrowers apply for loans and if accepted by the platform, borrow money from “the crowd,” then pay it back with interest. P2P lending platforms generate revenue by taking a percentage of the loan amounts from the borrower and/or a loan servicing fee from investors.
For the borrower, getting a P2P loan can be simpler, quicker, and cheaper than borrowing from a bank.
For the Investor, interest rates are high enough to generate strong returns (potentially better returns than traditional money markets and bonds) with less volatility than stocks and a fairly reliable monthly cash flow of interest and principal payments throughout the term of the loan.
Each borrower approved on a P2P platform receives a credit-risk score and interest rate set uniquely by that platform, acting as an intermediary between borrower and investor. Higher risks yield higher rates to stay attractive, of course.
Investors can select individual creditworthy borrowers based on their risk/rate profiles and project. Alternatively, investors may select a package of loans, which allows diversification among many borrowers.
The growing popularity of P2P, started attracting institutional investors such as insurance companies and pension funds, which accelerated growth further.
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