Monday, 8 February 2016

Entrepreneurs: Peer-to-Peer Lending vs. Crowdfunding

Alternative forms of business finance have become quite popular these days considering how difficult it is to get loans from traditional sources. Crowdfunding and Peer-to-Peer lending are two innovative ways to acquire funds for your business. Both industries have been making headlines and catching eyeballs over the last few years. While they have similar concepts, P2P lending and crowdfunding are actually very different from each other. This is something people do not realise.

Crowdfunding is a process where business owners can create a campaign which consists of a pitch and rewards that backers will receive if the campaign is successful.  Crowdfunding opens your idea to a marketplace of supporters. Peer-to-peer lending is slightly different. In this business owners upload their requirement and all documents necessary to prove your worth as an entrepreneur. P2P Lending platforms then puts you across registered lenders who take a look at your profile and they may fully or partially fund you.

Both options have great benefits but at the same time, they also have drawbacks.

Drawbacks of crowdfunding:

  • You need to fulfil all rewards you promised: You cannot do whatever you please with the money. A lot of the money goes into producing the end product and actually shipping it to your backers
  • It’s a public endeavour: If you fail, you will fail publicly with thousands of backers losing their money.
  • You need to bring your own crowd: In order to rank well and show up on the websites initial pages you need to already have enough momentum. Most crowdfunding campaigns don’t even receive pledges from strangers and majority of their funds come from their own social network and marketing efforts.
  • Marketing is a must: This takes time to develop and launch and at some point you will exhaust your own social network.

Drawbacks of Peer-to-Peer lending:

  • Payment of EMI: Once the funds have been received, you have to start paying off your loan almost right away in the form of EMIs. Any default regarding repayment will have very serious repercussions and therefore you must be very punctual.
  • The amount you can raise: It’s easier to raise higher amounts of funds via crowdfunding rather than Peer-to-Peer lending. Since the number of Peers providing the funds are much lower, the funds provided are generally lower.
While both options are great for raising funds, Peer-to-Peer lending definitely has an edge over crowdfunding. It is a fast and accessible way of getting funds injected into your business. The primary plus point of using either options is that you don’t have to give up equity. With Peer-to-Peer lending you do not have to market since the platform will get you in touch with potential lenders and at the same time strangers will lend to you. You do not need to bring your own crowd to get funds.

Peer-to-Peer Lending as an alternative finance option is becoming more and more popular by the day. It is time to embrace it for the growth of your firm and to be able to take it to the next level.

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