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It’s Day 5 of the #AtoZChallenge and I’m exploring equity crowdfunding. Although crowdfunding is still a relatively new concept to many of us, we tend to think of the reward-based crowdfunding first. However, it is possible to get investors to loan you relatively small amounts each to finance a project. I interviewed Marc Rafferty of Irish company Linked Finance to discover some more.
1. How does equity crowdfunding differ from ‘reward’ crowdfunding for someone creating a business product? Is the only real difference the fact that you repay a loan rather than offering a reward?
Linked Finance is an alternative to bank borrowing so the loan is paid off monthly over 3 years. This means the people on Linked Finance are more ‘lenders’ than ‘investors’. They want to support SMEs with a track record, and in return make a decent return. Crowdfunding with rewards is for more of a ‘punt’ or something you ideally believe in, rather than a lend to a company you fully expect pay back from. We also encourage lenders to invest in a variety of different business loans .
2. I understand the minimum is €5,000. Is there a maximum? Is there a standard interest rate or do the lenders decide on them individually? How long are the terms for the loans?
The maximum is 50k and in next six months will probably go to 100k. Average % rate is 8.9% but the lenders themselves decide the rate. This is people power at its most effective. At present, all loans are 3 years.
3. Is there an average in terms of how many lenders fund a project? If a business secures loans from 30 lenders, how do they repay it in terms of getting the money to all thirty? Are payments made to Linked Finance who deal with the paperwork?
Average per loan is 146 lenders. Yes, monthly payment made to Linked Finance and then our technology distributes to all lenders accounts.
4. Can you describe a couple of typical projects?
You can see all the LIVE loans on the marketplace page of our website.
The last Farm we helped expand was Boyne Valley Farmhouse Cheese. They raised 20k at 7.5% from 334 lenders to help with new machinery for packaging their amazing Goats cheese product.
Another example would be one that finished earlier this week, Evo Fitness. they raises 10k from 113 lenders to help them expand and revamp one of their 4 gyms.
5. Does it happen that a business can be oversubscribed with loan offers? How do they choose which to accept?
All loans get oversubscribed which is great. The 100% loan total with the lowest % rate bid, gets accepted by the borrower.
6. Do lenders receive any other benefits besides a higher lending rate than they might get in a saving account? Or is it a ‘feel good’ factor? Is there a risk they might lose their investment?
They also get offers from the business borrowers on a monthly basis. The ‘risk’ is small as we vet all businesses for ability to reply. We predict a default rate of 1.5% and therefore advise you to spread your money into many businesses.
7. What recommendations would you make to businesses in terms of creating a good pitch? Is it just financial and a good business plan? Should they create a video and showcase their business/ product in a similar way to reward crowdfunding?
We post the business profile and the financials of the business for our lenders to see. A business just needs to describe itself fully and accurately, the human story is almost always as important as the cold hard facts.
8. Is Linked Finance limited to Irish lenders and businesses or is it worldwide?
At the moment just in Ireland, our goal is to really help Irish SME businesses. However worldwide, Crowd Funding of this type is growing massively as an alternative to the banks.
9. What types of business can avail of Linked Finance?
We can help any business, Ltd company or sole trader, as long as it is in operation at least 2 years, can prove an ability to repay and is a solvent operation. We do not help start ups, as that is a higher risk profile than our lenders want.
10. Final question, Marc, do all applicants have to receive the full loan amount in order to be deemed successful and receive any money? Is it the same ‘all or nothing’ concept of many other crowdfunding platforms?
Yes, Lorna, you need to get 100 percent. However if you go to the Marketplace section of our website, you will see every loan gets over 100 percent. Why, because we have so many lenders and dozens joining every day. They join because they are helping Irish businesses and also at the same time making a great interest rate return on their money, compared to zero or low rate you get on your money in your deposit or savings bank account.
If you have any other questions about equity crowdfunding, do ask them in the comments below and Marc will be delighted to respond. Do you have a business idea that might be more suited to equity rather than reward crowdfunding?