Risky crowd

Platforms pluck business owner bare

The Crowdfunding Act sounds sympathetic, but there is a big catch once a business owner gets into dire straits. This is because crowdfunding platforms often block a debt settlement with investors. Instead, the platforms appeal to the business owner in private to repay the debt to the investors. With dire consequences such as repossession of your house, car and other private property.

A company in financial trouble does not have to go bankrupt. A debt settlement or creditors' agreement can be a solution. In a debt settlement, creditors are paid a percentage of their claim. Final discharge is granted for the remaining claim. While the creditors lose some of their money, in bankruptcy they get nothing at all. Moreover, the customer continues to exist, so the business also remains. For the business owner , a debt settlement is one of the best options out of misery.

Crowdfunding platforms are not keen on such a debt deal. Instead, crowdfunding platforms prefer to address the business owner privately to repay the debt to investors. The platforms have become wiser through trial and error. Recently, several hospitality projects funded through crowdfunding have gone bankrupt.
The message to investors that they can write the money off on their bellies is not a tasty one for such a platform or website. They have come up with something for that, and that is to hold them jointly and severally liable.

Seizing private property of hospitality entrepreneur

A business owner seeking to borrow money through crowdfunding must meet certain conditions set by the crowdfunding platform. Those conditions vary quite a bit. But if the application is approved and the "crowd" provides the business owner with a loan, the business owner will be required to provide certain security to repay the loan. Because the security for financiers in the hospitality industry is often very disappointing (see box Investors turn up their noses at the hospitality industry), personal security will be required of the hospitality entrepreneur. This is called a declaration of joint and several liability or a deed of guarantee.

There are many differences between these declarations of joint and several liability, but they basically boil down to the same thing: the hospitality entrepreneur is called upon privately to repay the debt to the investors. Even if he thinks he is doing business "safely" from a limited liability company, he will be privately liable for the debt to the crowd.
Payment scheme for the business owner

Joint and several liability can have far-reaching consequences such as a seizure of the home and household goods, and their sale. Alternatively, the business owner may have to repay the debt to the platform from the profits of one of its other businesses. The business owner will then receive a letter from the crowdfunding platform asking him to pay the amount of the total debt or the capped guarantee.

If you cannot pay that amount in a lump sum, the platform may enter into a payment arrangement with business owner , but you must be able to honor such an arrangement. That arrangement will often require repayment at the same rate as the original funding, so the crowd investors will be repaid according to the initial repayment schedule.
If, as business owner , you do not comply with the payment request or the payment arrangement made, the crowdfunding platform can seize all private property and, through the bailiff, sell your house, car, (shares in) other exploitations or your private belongings. Sometimes this requires first obtaining a judgment from the court, but if the joint and several liability is recorded in a notarized deed of pledge or mortgage deed, this is not necessary.

Duty of confidentiality crowdfunding platforms

A debt settlement is sometimes stopped by crowdfunding platforms. A platform can do this because the "crowd" is anonymous to the business owner. Normally, a business owner sends a letter to creditors explaining the difficult situation that has arisen and proposing to write off part of the claim for partial payment. That letter also states the percentage of the claim they do get paid. In the case of crowdfunding, the business owner cannot easily reach all financiers. Simply because he does not know who has invested in his business. And the platform or website has promised confidentiality to the investors. Practically speaking, this is a big problem. No doubt there are parties in the crowd who have invested small amounts because they like the hospitality concept or give business owner a chance. Those may think, if things go wrong, "too bad about that money, never mind. Those parties cannot reach the business owner because the platform is in between.

The platform may also choose to give its own opinion on the proposed deal first, and not consult the proposal with the individual investors. Or it does, but with a negative opinion attached. Even then the business owner has no control over communication with the investors - which is crucial at that very moment. The favor factor that you had as an enthusiastic hospitality entrepreneur with a beautiful concept when you asked the crowd for funding, you can no longer use when offering a deal. That's a missed opportunity.
Moreover, crowdfunding does not involve one or a few investors or funders, but perhaps hundreds of lenders. For a debt deal to succeed, in principle all of those lenders must agree to the restructuring proposal. There are exceptions to this, but they have to be enforced in court. That is not easy and often expensive.

Crowdfunding without risk

All in all, crowdfunding involves quite a few risks that business owners never thinks about when arranging financing. The plans are always beautiful and the enthusiasm is great. They don't think about a bad scenario. Our advice is to think of the worst case scenario precisely when entering into financing.

• Read the fine print of crowdfunding platforms. Especially those under the heading of liability.
• Not all crowdfunding platforms require joint and several liability. Sometimes a surety bond is required. This may be capped at a certain amount. You can negotiate that.
• Not all crowdfunding platforms guarantee anonymity for investors. For the business owner to it is an advantage to arrange crowdfunding through a platform where you do have direct_s communication with investors.
• With a crowdfunding platform that does guarantee anonymity to the investors, make good agreements about communication with the investors. For example, about news about your business (opening, new menu, start of the terrace season, special actions for the investors) but also about communication in case things go badly.

Investors turn up their noses at hospitality industry

In the hospitality industry, many investments lose their value almost immediately. There are several reasons for this.

• Many investments are modifications to the premises. Think of insulation, a new floor, new toilet groups. That benefits the premises. That's where the shoe pinches for lenders. In the lease, the business owner 's claim on the landlord because of improvements to the premises is 'written away' by default. At the end of the lease, the tenant loses his investments. business owner and landlord can deviate from this in writing, but often this does not happen. (Agree on this when entering into the lease!). A business owner naturally hopes that the investments will contribute to sales and earnings. When sold, this should lead to higher goodwill. For financiers, this is not a safe security. If things go badly, goodwill is out of the question.
• Investments in furnishings such as furniture, cash register systems and kitchen equipment are investments in so-called "bottom lines. If things go wrong, the tax authorities have a first right to these. The financier can have a silent lien, but in case of tax debt and bankruptcy, it is of no use to him. The value accrues to the tax authorities, and in case of bankruptcy to the trustee and the UWV.
• The hospitality industry hardly has any stock. At most, there is a stock of wine or spirits. In a bankruptcy, these are often recovered by the supplier with a retention of title.
• The hospitality industry has few accounts receivable due to invoice delivery. For financiers, invoices yet to be collected are a security.