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Debt crowdfunding allows investors to lend money to businesses or individuals in return for a fixed profit rate or an interest rate if the platform is not Sharia-compliant.
Crowdfunding is beneficial to both investors who get exposure to fixed returns as well as the business as they tap into new sources of capital that may not otherwise be available from traditional lenders like banks and finance companies.
In this blog post, we will discuss how debt crowdfunding helps investors and small businesses.
Debt crowdfunding, also known as peer-to-peer lending, is a type of investment where individuals can lend money to businesses or other individuals, usually through an online platform.
This form of financing increased in popularity as a result of the previously low-interest rate environment as it gave investors the opportunity to earn higher returns compared to the near 0% bank deposit rate.
Investors on debt-crowdfunding platforms can earn as much as 15% per annum whilst supporting local businesses. In addition to the returns, investors are drawn to crowdfunding from an impact angle.
On the other hand, crowdfunding provides small businesses with an alternative source of capital that can be used instead of raising equity capital which is typically more expensive, or going through the traditional routes of obtaining bank loans which are lengthy and cumbersome.
Debt crowdfunding is an alternative asset class that has fixed-income elements. Here are some benefits for investors.
Compared to traditional bonds. Investors can earn up to 13% per annum by extending financing to small businesses there may not be able to qualify for financing from banks.
Investors can quickly and swiftly create an account and get exposure to the asset class. This is significantly easier as opposed to investing in private debt funds or Sukuk which have high minimum investment requirements, often exceeding $1 million.
Financing SMEs has an impact angle as it creates jobs and drives the national economy. Research done by a MENA-based crowdfunding platform states that for every $15,000 lent, one job is created.
Another benefit of debt crowdfunding is that the underlying investments are fairly short terms, typically less than 2 years and very often less than 12 months. This gives investors added liquidity they needed.
The ability to diversify your capital across a number of opportunities is a great diversification option that investors should leverage whilst use crowdfunding platforms.
Debt crowdfunding can be a great way for investors to get involved in supporting small businesses whilst earning good returns. On the other hand, crowdfunding provides SMEs with an alternative source of finance that may be quicker and with more flexible terms as opposed to traditional lenders.
