What is Crowdfunding?
Crowdfunding is an alternative method of financing that has been growing ever popular in recent years as entrepreneurs and investors look past traditional methods of financing and investing.
As the name suggests, crowdfunding involves a group of investors providing the funds to finance a business. Investors provide capital in two ways; debt and equity.
Equity
Equity crowdfunding provides the investor with shares in the company and investors can often benefit from tax incentives such as the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS). Investors in equity crowdfunding profit from dividends and on the sale or takeover of the company.
Debt
Debt crowdfunding is lending money to a business in return for interest payments. The principle is returned to the investor at the end of the loan period. Unlike equity crowdfunding, when you debt crowdfund you do not own a proportion of the business.
Rewards
Many companies will offer rewards to investors such as free products or services and special discounts.
What is Peer-to-Peer Lending?
As the name suggests, Peer-to-Peer Lending involves individual investors loaning money to other individuals and receive interest payment as compensation.
Risks of Crowdfunding & Peer-to-Peer Lending
The risks of equity crowdfunding include long periods of waiting for an initial dividend and the risk of total loss of capital if a company fails. Platforms say that crowdfunding is only suitable for High Net Worth Individuals and Sophisticated Investors as well as advocating good levels of diversification.
Loans of any type involve risk of default, to manage these risks platforms conduct checks on individuals and companies and the interest rates paid reflect these risks.