Participatory financing
Participatory financing is the collective effort made by a network of individuals to provide financial support, usually via an internet platform, for an individual or company. It generally provides leverage with banking institutions, and is of interest to companies that are having difficulty finding all the credit they need to complete a project.
What are the disadvantages?
Participatory financing can be a quick solution for bypassing the banking sector, but with interest rates 3 to 4 times higher than in a bank. This borrowing rate is higher than traditional sources of finance, but is justified by the lack of collateral and a riskier type of financing for investors (often through mezzanine capital).
What are the advantages?
Participative financing is characterised by the absence of guarantees (generally reserved for banks). In addition, the funds raised are considered as equity by the bank, which makes it easier to obtain co-financing from banks.
It can be of particular interest to companies that:
- face increased financial requirements in the near future (e.g. major investments);
- have already reached a high level of debt.
Le crowdfunding
What is it?
Crowdfunding is a participatory financing method that connects investors (often small retail investors) with creative and/or entrepreneurial projects (often startups) through an online platform. The goal of this product is to raise funds from private individuals solicited from a wide audience.
Crowdfunding is just as suitable for real estate projects as it is for artistic or environmental ones. The idea is that if the public likes the project, they will be tempted to finance it. Neighborhood projects can also be highly successful, provided they appeal to local residents. Crowdfunding is an excellent way to help a young startup quickly develop its product on the market. This financing can take various forms: donations, loans with or without interest, or equity investments.
Advantages
Funding can be obtained very quickly; often a few minutes are enough. The entrepreneur does not have to provide guarantees. It serves as a form of mini-market research. If investors rush in large numbers, it means the project is appealing. This will also be a major asset when negotiating a subordinated loan with a bank.
Disadvantages
For a startup developing a new product on the market, the project will become public knowledge. This can give ideas to competitors with more resources to develop the project themselves.
The second disadvantage is that it is more expensive than bank financing, since investors take a high risk by financing an early-stage startup," that is the game." However, the startup must ensure that the product to be marketed has a sufficiently high profit margin to cover the cost of financing.
Le crowdlending
What is crowdlending?
Crowdlending is a loan operation aimed at SMEs. As with crowdfunding, the lenders are private individuals solicited from the general public via an online platform. Crowdlending is quite often accompanied by institutional loans (such as banks), which will then offer subordinated financing based on the amount raised via the platform. Crowdlending is therefore a form of participatory financing, often concluded as a loan agreement, voucher, or bond issue.
Advantages
As with crowdfunding, funds can be obtained very quickly (a few minutes are sometimes enough). The entrepreneur does not have to provide guarantees. If investors rush in large numbers, it means the project is appealing and reassuring. It is also an asset when negotiating a subordinated loan with a bank.
For which companies?
This financing is intended for companies that are at least at the scale-up stage of their life cycle, with a very clear track record of results. This formula is particularly suited to companies in a more mature stage of development that are looking for funds for their national or international expansion.
Under what conditions?
Companies applying for this form of financing must be able to demonstrate their borrowing capacity and, above all, their repayment capacity. It should be remembered that while these loans are less risky than those for startups, they still carry risk, which makes this type of financing expensive. It is also crucial for applicant companies to ensure that the products for which financing is requested generate a high enough profit margin to cover the costs linked to the loan. It is very often necessary to combine crowdlending and bank financing to reduce the overall cost.
Crowdlending platforms
- Beebonds
- Look&Fin
- Bolero
Friends - Family - Fools
What is it?
Generally speaking, entrepreneurs launching a project or who are slightly further along in the process (startups) are always looking for financial support to help make their business a reality. This is the hardest time to find funding, as the project is often only in its embryonic stage.
It is then often easier to find funds through an emotional connection rather than through rationality and ROI (Return on Investment). This is why founders naturally turn to Family, Friends, and "Fools" (which we might also translate here as "Benefactors"). It is not uncommon to find wealthy individuals who do not hesitate to give a young entrepreneur a boost.
Advantages
The terms of these "emotional" loans are obviously often very advantageous. They offer very good interest rates, highly flexible repayment periods, no personal guarantees, and often very creative repayment conditions. For example, a restaurant owner could repay in meals, an IT service provider in tech support, a florist in flowers... There are no strict rules in this area, though some will require a formal acknowledgment of debt. The repayment rules must then be clearly defined. The funds obtained can then be used as leverage to secure a bank loan.
Disadvantages
While FFF financing has major advantages, it also carries risks. Money matters between family members and friends can lead to major disappointments or even bitter arguments. For these reasons, it is absolutely essential, even if the money is lent out of pure "affection", that the conditions under which the funds are provided are clearly listed and put on paper.
Advice
Naturally, some of your lenders may want to have a say in the development of your business. What could be more natural? So, if you have the ability to choose, opt for lenders who will bring real added value to your company. Choose a person with marketing expertise over someone with no "useful" experience for the development of your business.
When approaching family members, friends, and potential donors, prepare your project, write it down, and think about it as if you were going to present it to a skeptical banker or investor. Remember that you are asking for "emotional" money, so it is important that the people you approach feel you respect them just as much as you would a bank
In this context, do not forget to inform your contacts about the risks of your business and, consequently, the risks they are taking as well. You will command their respect and most certainly their trust. Afterward, keep them regularly informed; you might still need them.
