Which type of crowdfunding is less risky? Debt or Equity
Debt and Equity are the two types of crowdfunding that are closely watched within the business circles by the entrepreneurs, startups and other established players. Also, the investors or fund givers weigh which model is more advantageous to them. Before to deciding which of these two crowdfunding models to opt, they have to weigh the advantages and disadvantages these got to offer. Doing so will help them select the type of crowdfunding that suits their idea, project, venture, etc.
In the debt-based crowdfunding, the entrepreneur or the project owner gets a loan from the investors. In turn, the investors are paid back with interest amount before to the fixed repayment term.
From the investors perspective, the peer-to-peer crowdfunding, as it is also known as, is very attractive. They get a fixed return so that their financial planning process is smoother.
This type of crowdfunding is less risky for both startup companies seeking funds and also investors. However, due diligence will be followed by most crowdfunding websites in order to eliminate any kind of fraud.
Apart from that, for a borrower or a fundraiser, getting of loans is quicker and also the interest rates are comparatively low than the rates the banks offer.
Importantly, the entrepreneurs or startup owners will retain their hold over their businesses. No stake will be given to the investors.
However, it is generally recommended by experts that this type of crowdfunding has to be opted by established businesses rather than startups.
This type of crowdfunding is ideal for startups. They receive funds from the investors but do not have to repay the amount in return. However, the investors will get the shares in the company, depending on the amount they invest. Simply, the investors will also become owners or stakeholders in the company or startup they invest.
Investors, who get shares, can at a later point of time, when the company grows and succeeds, can sell the shares at a higher price, and thereby make huge profits.
From the borrower perspective, they do not have to repay the money; however, they should strive hard to make their startup successful. That said, the investors will have a greater level of risk when compared to investors who opt for debt-based crowdfunding.
Crowdfunding through the online medium has been gaining wider acceptance and is now a boon for startups looking for funds. Many crowdfunding websites are catering to the needs of fundraisers and investors. Starting a crowdfunding website is also now easier with the use of high-quality debt crowdfunding software and Equity crowdfunding software of Agriya.