Crowd Lending Can Accelerate the Growth of Your Purpose-led Business
For any business or venture, there comes a time to accelerate growth,
Accelerating growth requires access to funds.
For social impact-related ventures and plant-based businesses, it can be even more challenging because the market size is considered small.
One of the questions we are asked most relates to funding.
Whether it’s a for-profit enterprise or a not-for-profit, how do you attract funding into the venture?
Naturally, without access to funds, there is a significant barrier to enabling the growth of the venture and stifles your social impact.
In this blog, we share a fresh approach to gaining funds for the business through crowd lending.
- What is crowdlending?
- Who is this for, and how does it work?
- An example and frequently asked questions
What is Crowd Lending
To appreciate crowdlending, let’s first look at how a bank operates.
A bank borrows from depositors for x%, let's say 2%
And then lends out at x% + y% (2%+5% = 7%) to the Borrower. The bank makes the y% margin for providing the facility plus admin fees.
To protect the banks over time, the process of borrowing has become far more difficult from the bank. This is especially true if you don’t have collateral, like equity in a house.
For commercial loans and especially for small businesses, interest rates are much higher. Small businesses can be paying an interest rate of 15% per annum in Australia and even as high as 37% per annum.
We were truly shocked to see these challenges.
Crowd lending is a refreshing new approach which allows the crowd (think fans & supporters) of the venture to lend money in return for interest.
So, the lender will receive the (x% + y%) for providing the loan to the lender.
Crowd Sourcing Vs Crowd Lending
Over the last decade, many of us have now become familiar with the crowdsourcing aspect of fundraising.
Crowdsourcing can provide cash before the product (or service) is made or even support a philanthropic campaign.
The challenge for purpose-led small businesses is that they may want to retain ownership or not dilute equity in the company just yet.
They may prefer to borrow the money to grow the business before deciding whether investors are needed. This is where crowdlending can help.
LendForGood (L4G) is a crowd lending platform that purely services impacted related ventures.
Cameron Neil co-founded L4G after seeing the need with his work at Red Hat Impact. Cameron has a long history of working with Fair Trade and impact-related not-for-profits and for-profit businesses. Cameron dives into why he founded LendForGood with Pro Bono Australia.
Cameron saw the desperate need for a platform to support impact-related founders where they did not have to give up a large chunk of their venture at a very early stage. L4G also presents an opportunity and attracts fans to support the venture in return for interest instead of equity.
LendforGood’s other co-founder is Start Some Good (SSG), which has a well-established back-end platform to enable the processing to take place. SSG has been around for more than a decade.
LendForGood enables anyone to join the crowd and easily lend capital to fuel impact enterprises as they solve social and environmental challenges in their local communities and around the world. Lend your passion and help impact enterprises access capital at the right time, on the right terms, to meet their business needs and deliver more impact - Cameron Neil
Who it Serves & How it Works?
As the name suggests, LendForGood focuses on helping social impact-related ventures, both not-for-profit and for-profit.
What creates social impact? Is the service or product better for the planet and/or better for humanity?
Naturally, all plant-based businesses will qualify as impact-related businesses.
L4G uses blockchain technology to hold the Borrowers’ and lenders’ relationships.
“Blockchain is a decentralised ledger of all transactions across a peer-to-peer network. With this technology, participants can confirm transactions without a need for a central clearing authority.”
Now you may ask a question about the due diligence of the Borrower before they sign up for the platform. This is the role of the intermediary.
We are excited to share that Purpose With Profit has been accepted to become an intermediary with LendForGood.
Borrowing funds needs to be carefully considered. The intermediary provides this service to the Borrower for a fee.
At Purpose With Profit, we are frequently asked the following questions:
How do I find investors?
Banks won’t lend us any funds. Where else can I borrow from?
Are there any grants that can assist?
Do you know any silent investors?
Does this sound familiar?
We have seen businesses turn to high-interest loans to help them get through a short period. But some of these interest rates are so high that they suffocate the company for a long time.
Usually, these funds are needed due to not having enough working capital or a significant growth opportunity has suddenly appeared. Sometimes it could be an unforeseen business interruption.
Under these circumstances, businesses need access to funding.
This is where crowd lending can be of benefit.
As long as there is good management, business plan and sound financial model in place to make good on returning the funds with interest in due time.
What Qualifies Us To Be An Intermediary?
As Purpose With Profit, our founder and CEO is Bob Ratnarajah.
Bob has an accounting background and has worked in senior finance roles for over 20 years. He has built budgets from start-up to $500 million for small, medium and large organisations, like Cochlear, Virgin Mobile, Allegis and even the Australian Tax Office.
He has re-engineered business models and processes to ensure a business is competitive. Bob has also worked with NFP environments and understands multi-stakeholder challenges.
For our one-on-one advisory, we work with a select few clients to help them build a strategic business growth plan.
So naturally, we are very well qualified to assist any venture to grow.
We also have a panel of experts in their fields to assist as needed.
Our experience will provide more comfort to the Borrower and the lender to ensure there is good business management and a financial model to return the funds in due course.
Who Can Apply to Borrowers
At Purpose With Profit, we work with:
- Ambitious founder(s) who want to grow their venture
- Plant-based food industry or social impact-related enterprises
- Not for Profits open to revenue growth & impact.
- Open to bringing advisors for the medium term.
- Open to creating a solid business case and funds to be repaid in due course.
Since we are talking about a debt instrument, Purpose With Profit will need to work closely with businesses that would like to apply for a loan.
The loans can range from $20,000 to $500,000
Who are the Lenders?
There are a panel of impact lenders on the LendForGood platform.
After saying this, just like crowdsourcing, as a good business, you will have evangelical fans that will want to support your business in several ways.
You can reach out to your fans to become lenders to the business for a commercial return.
LendForGood is open to all to become a lender. Lenders can visit the website and express interest in becoming lenders.
It’s a win for the supporter, a win for the Borrower and a win for humanity and the planet.
Fees & Charges
The interest rate will depend on the business model and the risk and is set by Purpose With Profit and the Borrower based on the cash flow modelling that we present to the potential lenders.
The interest rate will be significantly less than the usual commercial rates available in the market.
With a robust business model and value proposition, the business can attract funding because they are an impact-related business.
There will be administration fees, just like all loan transactions of this nature.
An Example & Frequently Asked Questions
A venture needed funds to recapitalise the business and pivot the company in a new direction. The Borrower did the groundwork and tested the new model with their customers. They realised they might need a six-month repayment holiday to work on the business.
With a business model and financial plan, a six-month repayment holiday was requested, with a 10% interest rate to be paid to Lenders. The amount borrowed is $300,000 for 18 Months.
Loan amount $300,000
Interest Rate: 10%
Period: 18 months
Repayment Holiday: 6 months
Total Interest: $45,000
Capital & Interest to be repaid: $345,000
Monthly repayment: $28,750/month for from month 7 to 18.
Repayment period: Monthly or Quarterly.
Relationship with Lender & Borrower
Unlike the banks with L4G, the Borrowers and the Lenders have a direct contractual relationship.
The L4G platform reminds the Intermediary and Borrower when the repayments are due.
Risk and Default
Like all types of loans, there is a degree of risk with these loans. Borrowers need to work closely with the Intermediary to create or validate the business plan & model and ensure it’s being implemented for the duration of the loan.
The L4G loan is an enabling mechanism for impact-related businesses that find it challenging to raise funds the traditional way.
Business is inherently risky. If the Borrower looks like they are about to default on the loan, the Intermediary and Borrower can contact the Lenders to make arrangements for deferred payments.
The term blockchain is synonymous with cryptocurrencies. Blockchain is the technology that allows cryptocurrencies to trade. L4G has nothing to do with cryptocurrencies. Blockchain technology ensures trust in the transaction between both Lender and Borrower.
In the absolute worst-case scenario, the Borrower may default on the loan.
For those who have been to our events and presentations, you’ll know that we have been researching and supporting businesses as a force of good since the global financial crisis and finding new ways of doing business.
Whether it be the rise of electric vehicles, blockchain, or plant-based food consumption, it’s all related to the growing conscious consumers wanting to live differently to protect our planet and create a fairer society.
Crowdlending is part of this cutting-edge change we are seeking.
Crowdlending provides an avenue for purpose-led founders to find funding in a novel way and reward their supporters, creating a win for all.
After saying this, respect must be given to all stakeholders to ensure we set the right precedents for many years ahead.