Small and medium-sized businesses looking to acquire capital have many avenues to consider- from family and friends to bank loans and even angel investors, to a newly popular option: crowdfunding. Though there are multiple types of crowdfunding evolved through time.
Crowdfunding has been rising in popularity as in many ways, it puts the control back in the hands of the small and medium-sized business owner. It’s actually projected that crowdfunding will reach over 150 billion by 2025. A growing niche isn’t it. And with banks becoming more and more strict on requirements when financing newcomers, this sector is projected to boom even more. Business owners can raise capital on their own terms and retain more control over their business. Especially in recent months when the need for funding is at an all-time high, crowdfunding can be a very handy tool for businesses, and what’s most importantly, it doesn’t require the big hassle bank applications usually take them to. Crowdfunding may help small business owners receive capital fairly quickly from those who know and love what they do or those who just like the idea and being part of the backing of it. And with that, businesses have even additional plus on this – they spread the word about themselves as well as investor community usually share their point of view of targeting business around social media channels and different forums.
On Wisefund, businesses are able to offer debt securities, here’s the breakdown, but we’ll take a closer look to other types of crowdfunding as well:
Debt: A debt security is similar to a standard loan, like a car loan. It can be bought and sold between two parties and basic terms such as the amount borrowed, interest rate, and loan repayment date are determined upfront. Debt securities are often attractive to those who want to retain full control of their company and believe they’ll be able to handle fixed payments for the duration of the security.
Equity: Equity represents ownership in the business. Depending on the type of equity issued, the security may include voting rights, first right of refusal, or clawback rights. Offering equity is a great way to raise money quickly without needing to pay that money back. However, business owners need to be comfortable relinquishing some control and ownership of their business. Interestingly, some crowdfunding platforms offering debt-based loans have raised funds for themselves via equity crowdfunding. Remember the latest Estateguru fundraising on Seedrs?
Revenue Share: Revenue shares are very similar to debt securities – the main difference being that the interest rate and loan repayment date depend on how well the business does. Businesses pay back a percent of net revenue each quarter until the loan is paid in full. When the business is doing well, investors may receive larger payments; when the business is slow, payments will be lower. Offering revenue share instruments allow businesses to retain full control of their company and can be favorable if a fixed payment amount can’t be supported or if their revenue is cyclical in nature (for example, a business that realizes most of its revenue during the winter holidays).
While there will be additional factors to consider when setting the terms of a crowdfunding raise, this is a good start and overview of what to expect. Have additional questions? Reach out to us today.