Crowdfunding as a Loan Product
That’s right – it’s more than asking your friends and family for donations, and new platforms are making it easier for businesses to tap into community capital as loans.
Here at the Community Investment Corporation, we’ve been exploring alternative funding models to help more entrepreneurs find their way on to the capital ladder. With the need greater than ever, we wanted to expose our community to crowdfunding as an option and clear up some questions our borrowers have about the platform.
Crowdfunding at a Glance
A method of raising capital through the collective effort of friends, family, customers, and individual investors. Instead of a single loan or a small group of investors, crowdfunding is raising small amounts of money from a large number of people, typically through an online platform. (Source: Fundable.com)
Types of Crowdfunding
There are many different types of crowdfunding, but for the purpose of this article, we’re going to compare and contrast two different kinds – donation platforms and lending platforms.
Donation-Based Crowdfunding
Donation-based crowdfunding assumes you will not be repaying people who donate to your cause. Common donation-based crowdfunding initiatives include fundraising for disaster relief, charities, nonprofits, and medical bills.
Lending-Based Crowdfunding
Unlike the donation-based crowdfunding, lending-based crowdfunding allows contributors to loan your company money for repayment over time. Each lending-based crowdfunding platform has different repayment terms. Two we want to highlight here are Kiva and WeFunder.
WeFunder
WeFunder – Lenders are repaid over a period of time based on a percentage of the revenue the company generates and usually for a percentage gain. Loan size is $50,000 – $1MM.
WeFunder is helping entrepreneurs during the COVID-19 crisis by providing a platform to raise $20,000 – $1MM on their platform through the crowd. Repayment would not begin until 2021, and it would be dependent upon the revenue the company is generating. As a lender, you would be paid back through distributions of 5% of the company’s revenue over time until the loan is repaid in full at a 3% interest rate. The interest does not compound.
The minimum amount a lender must invest in a WeFunder campaign is $100, so that’s something else to keep in mind when you think about asking your network of friends and family for investment.
The Benefits of Crowdfunding
Businesses need working capital. People have money they can loan.
Consider the message to potential investors when you are considering a crowdfunding campaign. Businesses that will be generating revenue (again, but perhaps need bridge funding at the moment) who are looking to raise working capital should consider lending-based crowdfunding. The ask is easier for your customers, friends and family to loan money than to donate money.
For projects or campaigns that are not ever meant to be businesses or to generate money (art projects, medical expenses, etc.), consider a donation-based crowdfunding campaign.
If you’re interested in a Kiva loan, email Paul Mendoza, Capital Access Manager, Kiva Tucson at paul@growthpartnersaz.org or call 520-891-4413. Tucson and all of Southern Arizona is a US Kiva Hub, which means we have resources to help you navigate the process and increase success rates on the platform.
If you’d like to learn more about WeFunder, The Community Investment Corporation is a partner and we can accelerate the process for businesses in Southern Arizona. Reach out to Carie at danny@cictucson.org for more information, or call 520-529-1766.
