Equity Crowdfunding and Debt Crowdfunding are the two most prominent tools of Crowdfunding used by small businesses and new ventures worldwide for raising capital.
With Debt Crowdfunding, investors pledge a certain amount of money, which after the stipulated duration; campaigner has to return to the investor along with the interest money.
Equity Crowdfunding is more like an IPO of an unlisted Company. Organizations liquidate a part of their equity stake to raise the capital. There is no obligation on the organization to return the invested money. Besides, the investor will probably get no monetary benefits out of the investment made until the company reaches a successful exit.
Benefits of Debt Crowdfunding
- Ownership is retained – With Debt crowdfunding you do not have to liquidate any of the company stocks. That means you get to operate keeping complete control of your organization. Nonetheless, diluting your equity for a minuscule amount may seem very expensive to you in the long run.
- Easy to raise – Raising capital via debt crowdfunding is much easier than equity crowdfunding. The biggest reason is that the investors get a periodic monetary benefit out of the investment made. That keeps the interest of investors intact. On the other hand, with equity crowdfunding investors are unsure about for how long their money is locked. That kind of discourages ordinary investors from picking up on equity crowdfunding readily.
- Best for raising short-term capital needs – Deft Crowdfunding is best if you are looking to raise money for a short duration. It could be for working capital. It could be for meeting additional production demands during peak seasons. Or else, for buying new machinery that will induce improved cash flow faster.
Benefits of Equity Crowdfunding
- You can use all the retained earnings into business – With Equity Crowdfunding, you are not bound to pay any financial benefits to your investors. However, you can pay a dividend now and then if you wish to. That gives you freedom to invest all the profit earned back into the business. Nevertheless, with equity crowdfunding you get to use the raised capital without any stress of paying back within the set due date.
- Suitable for enterprises with low cash flow – It is a very common sight that profit-making businesses are weak at cash flow. It is best for such organizations to stay wary of debt financing. The rate of interest offered in the case of debt financing is usually in 2 digits. That can become too much of a burden for an organization which does not have a steady and substantial cash flow.
- No need to keep any collateral for raising funds – Many crowdfunding portals demand collateral from companies going for debt-crowdfunding. That is not the case with equity crowdfunding. For equity crowdfunding, all you need is a potential but attainable expansion plan along with a very meritorious team.
This article is written by the Crowdfunders Editorial Team. In Asia, Crowdfunders.Asia is a leading portal on providing news related to crowdfunding, start-up, property and business. It is operated byCoAssets.com.
CoAssets is South East Asia’s first listed and largest real estate crowdfunding platform. If you have any Crowdfunding news or stories to share, please email [email protected]