By David Drake
According to the Democratising Finance report developed by DealIndex, debt crowdfunding is becoming increasingly popular with more established business enterprises opting for this form of alternative financing to raise capital. Based on this report, 74 percent of crowdfunding platforms in the UK were debt-based, and debt crowdfunding grew by 190 percent in 2014. This clearly shows that the popularity of debt crowdfunding is not about to stop; just the opposite. In 2016, we will start seeing acceleration on debt as more platforms change direction. The 12-18 month hard money debt notes will lead the way in 2016, and here’s why:
1. Previous debt crowdfunding trends
Debt crowdfunding is one of two ways that the public crowd gets to invest in projects syndicated online through crowdfunding sites. Some entrepreneurs tend to prefer debt crowdfunding over debt equity because with the former, they do not give up part of their ownership to investors. In 2014, debt crowdfunding grew by 190 percent, and dominated the industry raising $11.08 billion of the total $16.2 billion worldwide. In 2014, debt crowdfunding dominated the industry, raising at least 68 percent of the total amount raised through crowdfunding. This form of crowdfunding grew by 223 percent in 2014, to reach almost raise $11.08 billion according to the Crowdfunding Report released by Massolution in 2015.
2. Peer-to-Peer borrowing is gaining traction
Many platforms today are turning to debt crowdfunding as equity crowdfunding has proven to be difficult and somewhat slow. Debt crowdfunding is gripping both commercial users and consumers as seen in the recent IPO on Lending Club, one of the largest debt crowdfunding platforms. According to the Democratising Finance Report, this platform issued loans amounting over $9.2 billion in 2014, while Funding Circle, another leading debt-based platform, issued loans which totaled close to $1 billion. US investment bank Morgan Stanley predicts that P2P could reach $490 billion globally by 2020.
3. Cash flow from institutional investors and venture capitalists is increasing
Institutional investors and venture capitalists are teaming up with crowdfunding platforms to inject huge amounts of money for onward lending to projects that seek funding on these platforms. According to the 2015 Times Realty News Real Estate Crowdfunding (RECF) Report, this trend is becoming common in the real estate sector. 2014 saw RECF platforms such as Realty Mogul, Sharestates, RealtyShares, Fundrise and Patch of Land receive financing from institutional investors and venture capitalists to create loan facilities that enable them to pre-fund real estate projects. While the strategy of pre-funded deals helps address the need to raise capital fast among real estate developers, it is also promoting debt crowdfunding in the sector. RECF platforms are also benefiting from this strategy because their deal flow and transaction volumes keep growing as the confidence of developers in crowdfunding grows. On the other hand, institutional investors and venture capitalists earn interest on the funds they lend to developers through RECF platforms. As we move into 2016, this trend is likely to grow, and we are likely to see debt crowdfunding accelerate even more.
4. Growing Confidence in Crowdfunding
The rate at which crowdfunding is growing is a sign of the confidence that both issuers and sponsors have in the industry. In 2014 alone, the industry grew by 167 percent raising $16.2 billion globally. By the end of 2015, the sector is expected to hit the $34 billion mark, while the 2015 Times Realty News Real Estate Crowdfunding report projects a 150 percent increase in real estate crowdfunding from $1 billion in 2014 to $2.57 billion by the end of 2015. This growth trend means that more and more entrepreneurs are opting for debt crowdfunding to raise capital, and the growing confidence of entrepreneurs and investors alike will definitely catalyze its upsurge in 2016. If this growth trend continues, debt crowdfunding will continue to dominate the crowdfunding industry in 2016.
David Drake is the Chairman of LDJ Capital, a multi-family office; Victoria Partners, a 300 family office network; LDJ Real Estate Group and Drake Hospitality Group; and The Soho Loft Media Group with divisions Victoria Global Communications,Times Impact Publications, and The Soho Loft Conferences. Reach him directly at David@LDJCapital.com.