Equity crowdfunding vs Lending crowdfunding: which one to choose?

Once you find out how many and what types of crowdfunding exist, it can be difficult to figure out which one to choose to raise capital and grow your business. Depending on the business model, stage of company development, company structure, and future goals, one specific type of crowdfunding may be more suitable than another. It should also not be forgotten that there are other forms of alternative financing in addition to crowdfunding: we have summarized them all in our article on the 8 pillars of capital raising, which every company intent on growing efficiently and continuously should know about.

But in this article we start with the simplest choices: equity crowdfunding or lending crowdfunding? These are the two best-known forms of crowdfunding and the ones that may appear most overlapping in purpose. In reality, the differences are many and it is important to make an informed choice between the two types, because one is not worth the other.

Therefore, before moving on to practical advice, it is useful to give a brief summary of the characteristics of equity and lending crowdfunding.

Characteristics of equity crowdfunding: a summary

Equity crowdfunding is the raising of venture capital online through the sale of company shares to investors. Let's look at its most relevant features:

• company opens corporate structure to the entry of new partners
• the company must open a capital increase with a notary public and establish the financial boundaries of the operation (minimum and maximum)
• investors pay in capital and in proportion to it and the pre-money valuation receive one or more shares in the company
• property rights and/or administrative rights of new members, predetermined by the company, are attached to each share.

A very close and long-term relationship is thus established between the sponsoring company and the investors. The company has no remuneration obligations to the new partners so they will be able to earn income from the investment through dividend distributions or by reselling their shares as the company grows.

Characteristics of lending crowdfunding: a summary

Lending crowdfunding is the raising of debt capital online by dividing the loan among investors participating in the campaign. Here are the most relevant features:

• the company applies for a loan by setting a minimum and maximum amount 
• the company determines the interest rate to be offered in exchange for the loan
• each investor can participate in the loan by paying in a portion of the required capital of his or her choice
• after the close of the campaign, the company returns the loaned capital to each investor and disburses the related interest in the time and manner agreed upon in advance.

The relationship that is established between the sponsoring company and investors is therefore short-term and bounded by a predefined time horizon. In addition, the company has definite obligations to investors: repayment of principal and payment of interest.

When and why choose equity crowdfunding?

Equity crowdfunding is a particularly useful tool for young businesses such as startups for the following reasons:

• Does not require you to prove your creditworthiness with metrics and historical performance (which a startup does not yet have)
• Allows the company's shoulders to be strengthened by expanding the capital stock
• allows you to bring useful professional contacts, collaborators, new customers and suppliers into the company
• Does not imply onerous obligations to investors
• is based on a company's potential in the medium to long term, not on offering short-term gain to investors.

For all these reasons, equity crowdfunding can be a very convenient choice for a startup that shows excellent growth potential but has difficulty finding sources of funding and can use this tool to combine quantitative and qualitative growth.

Moreover, startups are particularly attractive to investors in equity crowdfunding because their shares are very affordable: because the company is very young or newly established, the cost of buying shares is low and the prospect for growth high.

Even an SME or an even more mature company, however, can do equity crowdfunding, for example, to launch a new line of business or to open a company office in another country: to take any big step that leads the company to expand, to experiment with new activities, to change identity. In all these cases, it can be useful to welcome new partners into the fold, to get in touch with new skills and professionalism to be included in the path taken, to reach out to new groups or categories of customers.

Finally, equity crowdfunding is useful as an avenue for mature companies that want to go public, thanks to the Crowdfunding Listing mechanism.

When and why choose lending crowdfunding?

Lending crowdfunding is a particularly congenial tool for supporting and advancing specific projects in a targeted way. Not for nothing has it become the favorite tool of real estate crowdfunding:

• allows liquidity to be obtained quickly (shorter not only than banks, but also than equity crowdfunding)
• Has low costs and bureaucratic burdens
• Keeps corporate management entirely in the hands of ownership, without diluting shares
• requires no commitment from investors and offers short-term gains.

All of these features are perfect for real estate companies because they allow them to support the various phases of a project and avoid stalls through immediate liquidity while waiting for other financing from different sources. Indeed, real estate projects require substantial resources, which often come from multiple sources but require massive time and bureaucracy for disbursement. In addition, real estate is an attractive investment for a great many people, but for most people it is too much of an economic and administrative burden. Lending crowdfunding is very attractive because it offers the opportunity to invest in real estate from a small amount of capital and without having to shoulder the burden of managing a property.

The argument applies not only to companies in the real estate sphere, but to all companies that want to carry out a circumscribed project, expand the team, raise funds while waiting to have access to other financing: in all these cases the priority is short-term liquidity, with no binding long-term relationships or involvement of people from outside the company.

As a loan, however, lending crowdfunding requires interested companies to be able to demonstrate their creditworthiness and debt sustainability. To pass platform screening and do lending crowdfunding, therefore, you need to be at a stage of development where you are able to generate cash flow with which you can smoothly meet the loan repayment schedule.

For this reason, this type of crowdfunding is generally more suitable for companies with several years of existence behind them and a structured and functioning business model.

Equity crowdfunding vs Lending crowdfunding: why choose?

In conclusion, we would like to emphasize that different types of crowdfunding can meet the needs of the same company at different stages of development: choosing between equity crowdfunding and lending crowdfunding is only the first step; the second and longer and more efficient step is to study a long-term financing strategy that is capable of integrating and coordinating what we defined in the opening as the 8 pillars of capital raising. Finally, it should not be forgotten that choosing alternative finance tools does not exclude the use of more traditional sources of financing such as banks, venture capital, investment funds, etc.