Why Crowdfunded Business Loans Are Here To Stay
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UPDATED: Nov 27, 2012
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Far from being another internet buzzword, crowdfunded business loans will become a leading form of commercial financing. Crowdfunding, the pooling of wealth online by individual investors to offer business loans, is yet another online innovation that will become a method of investment as integral as conventional lending.
The reason that crowdfunding is doing well—and will continue to do so—is because of its very nature being online. Investors will never be in short supply because the desire for building wealth will never evaporate. Individual investors will crowdfund in order to take advantage of investment opportunities from the comfort of their computer rather than having to visit their local investment bank. Likewise, crowdfunding’s growing niche investment sites will allow investors to only invest into businesses they understand and like rather than dumping their money into a hodgepodge of various companies under some diversified mutual fund.
Borrowers, whether they are established businesses or budding entrepreneurs, love crowdfunding. This is because instead of obligating themselves to repay a business loan month-after-month, they can receive one-time donations in exchange for small “party favors.”
For those who do choose to go the route of borrowing commercial loans, they subject themselves to a fairly simple “either or” situation. Either their company is successful, which leads to the acquisition of money necessary for monthly business loan repayments, or their company does terrible and defaults on their debt.
On top of this benefit of avoiding monthly payments is the fact that borrowers are, in effect, marketing themselves not to a single loan officer at a bank or credit union, but rather to a crowd of potential investors. Convincing only a fraction of a crowdfunding group may give borrowers enough money to launch their business. In contrast to this, it is all too easy to simply be denied a private or government-backed business loan when the decision is left to a single lending officer.
Crowdfunding will continue to prosper because it fills a gap left by the conventional business loan industry.
Conventional lenders only lend money in relatively high amounts. Naturally, they require sizable and valuable collateral for such high amounts of capital. Crowdfunding, on the other hand, offers a better alternative to businesses that only require small or moderate amounts of money. This is especially true for small businesses, such as ecommerce businesses based wholly online.
But businesses aside, investors themselves love crowdfunding since they can invest a small amount of money into a business venture and see a sizable return on their investment (if they’re passionate about the gift an entrepreneur is willing to give in return for their investment).
Crowdfunding also allows investors to work together. The latest business idea or a recent startup can receive necessary funding due to the efforts of a single investor who read an article or spoke with an intelligent entrepreneur. This investor can bring an investment opportunity to the attention of other investors and lead to a whole community-funded effort. In essence, the interconnectivity of the internet can lead to investment opportunities far better than the small office of a business loan officer at a local bank ever could. The investment-opportunity-seeking eyes of a crowd of business loan lenders (which can even be international in scope) far outmatches the training (and more importantly the time) of a single business loan officer working a 9-to-5 shift.
Crowdfunding is an empowering form of business lending and investing. As the internet age continues to make bounding leaps crowdfunding will become a commonplace form of investing. It will become as common as smartphones, apps, cloud-stored data, and increasing interconnectedness. Wise lenders and wise investors will be sure to literally join the crowd and cash in on a new niche within the lending industry.