Dozens of startups face bankruptcy due to high crowdfunding costs: report

Update, 7 June 2019: This story was updated to include a response from Funding Circle.

Dozens of small companies that received crowdfunding from commercial platforms in the form of a loan, went bankrupt a short time later, according to a study by investigative journalism platform Investico, Trouw and De Groene Amsterdammer. The companies end up in financial troubles due to the high costs involved in repaying their loans, Trouw writes.

Crowdfinancing increased massively in popularity over the past years. A large number of parties, including private individuals, raise money for a goal. But now companies like Funding Circle from the UK use this method to issue loans, without banks being involved at all. While the Trouw points out that some crowdfinancing firms use the 'crowd' to raise funds, and then loan the money out to small businesses at very high interest rates like "old-fashioned money lenders", others including Funding Circle pool together retail and institutional investors to provide loans to small and mid-sized businesses.

Funding Circle told NL Times they provided 81 million euros in loans last year to the Netherlands, and has reached 3,500 small and mid-sized businesses in the Netherlands since 2015. Around 600 of these loans were provided at very high interest rates of 15 to 20 percent, Trouw writes. Some 292 loans were given at nearly 20 percent interest. In an email the lender said it does provide loans as low as 2.49%, and their average rate is more like 11 percent.

While Funding Circle said that their 50 thousand euro annuity loans at 20 percent interest means repayment would total 73 thousand euros over a four-year loan duration, while other loan providers could force total payment of 93 thousand euros including principal, interest and surcharges. Many of the loans went to companies who had too little turnover to be able to pay their monthly expenses or wanted to use the money to pay off other debts.

Funding Circle defended their work, saying they lend operating capital quickly to small businesses when they need the financing to fuel their growth. "Small businesses have been undeserved by traditional lenders for decades, both in the terms they receive and the service they are offered," the company said in a statement to NL Times. "All fees are provided upfront in a simple and clear way."

Nevertheless, dozens of the companies that received loans from several platforms went bankrupt shortly thereafter, according to bankruptcy reports studied by Investico. Many of the small business owners had to use their personal assets, or their family's, to pay back a loan with a personal guarantee, which means that if they cannot repay their loan they face both business and personal bankruptcy. 

These platforms do not have a banking license and the Dutch authority for financial markets AFM granted most of them an exemption instead of a license or permit. This means that there is very little supervision on these commercial crowdfunding platforms, though Funding Circle said they still adhere to any legal supervision required under the law.

"The lack of a regulatory framework stems from the fact the government has yet to formulate the regulatory and legislation trajectory for the industry," a spokesperson said to NL Times.

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