What is debt-based crowdfunding?
Debt-based crowdfunding encompasses several different types of crowd based lending. These include mini-bonds, peer-to-peer lending (sometimes known as 'peer-2-peer' or 'P2P' lending) and invoice financing.
Essentially, a large amount of retail investors (the crowd) lend money through a platform to a business or individual. In removing many of the middlemen that would be involved if the transaction happened through a bank, debt-based crowdfunding can keep the costs down for borrowers while potentially giving the lenders improved rates of return.
Mini-bonds typically have a term of three to five years and offer rates of interest such as 7 or 8%. They are still relatively rare although recently high-profile businesses such as Hotel Chocolat and John Lewis have offered mini-bonds. Read more about mini bonds.
Peer-to-peer lending matches savers or investors with businesses seeking finance. The businesses pay lower interest rates than they would ordinarily and investors get a better return than they would with an ordinary bank or building society savings account.
Invoice financing is used by some companies to help manage their cashflow. Many large retailers for example, pay suppliers on 90 day terms. To maintain a healthy cashflow, the supplier may turn to invoice financing - selling their unpaid invoices to a third party. Read more about invoice financing.
Equity crowdfunding - the alternative to debt crowdfunding
If investing in equity appeals to you more than investing in debt, then feel free to look through our comprehensive guide to equity crowdfunding in early-stage and growth companies.