By Tabitha Creighton
Finding capital for a startup can be as tough as any other part business and sometimes emotionally draining, since everyone seems to have an opinion on your concept. Borrowing money from a bank can be just as harrowing, however, borrowing money from “the crowd” via the Internet is one of the fascinating new ways for businesses to raise capital.
It is way of raising capital that permits high net worth individuals (corporations, trusts, other institutions, etc) to invest in businesses through debt.
Lenders discover opportunities to invest through general solicitation over the Internet or some form of public forum (social media, investor wikis, and so-on).
Why is Crowdlending a Good Thing?
Crowdlending has numerous benefits. A few are:
- It is a new source of capital for businesses. Bank lending levels are still in absolute terms lower than they were in 2008. This is particularly important for start-ups (of all kinds, not just tech companies), because start-ups create the most jobs out of any segment of business maturity.
- Crowdlending may create a source of capital for communities that have been underserved by traditional lending institutions.
- This form of raising capital can reduce the costs of borrowing. Interest rates can be lower and so can fees. Businesses can then use these savings to increase wages, improving sustainability and energy efficiency programs, provide better healthcare.
Okay…and the Risks?
Just like all other investment activities, crowdlending is risky for lenders. However, other forms of investment activity can be considered riskier due to the community aspect of the practice. Crowdlending typically means investing in a business in your community
Numerous researchers have published studies focusing on the relationship between community lending and default rates compared non-community bank lending. Recently, a study by the Federal Reserve concluded that the risk of default appears lower in community-based lending institutions.
To determine credit-worthiness, Crowdlender utilize the same due diligence tools banks use such as Experian and Dun and Bradstreet. Additionally, individual consumer lenders use the same servicing models as institutions; things like UCC Filings, collection activities, distressed asset sales are also all available now to.
As you can see, certainly there is risk, but one might argue that–compared to the stock markets–the ability to at least use a collection agency to partially recover an investment is better than what happened with the last financial meltdown.
Crowdlending vs. Crowdfunding
Crowdlending gives a community the opportunity to come together to lend money to a business to get it started, or to help bridge it through tough times in a more controlled and uniform manner. People have been doing this for years, but this way there is a bridge between the relationship and the investment.
The Internet and the JOBS Act has just made this traditional way of raising community capital much more efficient.
What is the Potential for Crowdlending?
The industry is only months old, and additional regulations at the state and federal level may make it easier or harder for the industry to grow, depending on how things shake out. So let your representatives know you want Crowdlending!
About the author: Tabitha Creighton is CEO and Co-founder of InvestNextDoor, a new Crowdlending marketplace that enables Main Street businesses to issue promissory notes to community-based investors, and provides back-office services to support businesses and investors throughout the borrowing and repayment lifecycle. You can find her on Twitter @tabcreighton, on LinkedIn at www.linkedin.com/in/tabithacreighton, on email at firstname.lastname@example.org, or at her marketplace at www.investnextdoor.com.