Are you an entrepreneur looking to start or grow your own business? If so, you may have heard many relatively new terms thrown around that come from the fintech world.
All of a sudden peer-to-peer lending, crowdfunding and marketplace lending are being talked about as options for people that the banks aren't willing to loan to.
Financial technology is exploding onto the scene, it's brought peer-to-peer lending and crowdfunding to the forefront but some people are still getting the two models of financing confused with each other. They have similarities, but they have different implications as far as cash flow and profitability are concerned.
Choosing which financing model fits your business best will depend on what kind of business you are running, what stage your business is currently at (Is it profitable? Is it tenured?), and whether debt or equity funding would be the better option for your business.
Crowdfunding Takes Your Story Into Account More Than P2P Lenders
Brand new startup businesses looking for outside funding usually try for crowdfunding because raising the money doesn't depend on the businesses current cash flow or profitability. Oftentimes, crowdfunding campaigns are based on how many people believe in your business model and idea. If people like your story and believe in your idea, you can get funded without having any kind of track history or sales. Crowdfunding is more about the story than the cold hard numbers.
What's In The Deal For The CrowdFunders?
Typically, crowdfunding offers two options to those who invest:
- Shares of the business: Startup entrepreneurs that need financing for a small business can give shares to investors in return for the the money donated.
- Rewards/Prizes for donations: Many times entrepreneurs that are pitching their projects will offer a discount on their products, a mention on their website for all contributors, a T-shirt or some other small gift. This often is well-received when the project is something that people are emotionally connecting to and just want to feel like they are making a difference for someone.
Peer-to-Peer Financing Is a Loan - Not a Donation
Peer-to-peer loans are considered debt funding. Small businesses borrow money from their peers through an online platform like Prosper Marketplace and pay the capital back with interest over a fixed term of years - three to five years is the norm.
As you can see, both models pool together business financing through online platforms and organize small investments that go on to help small businesses. That doesn't mean you can just show up and get money though. The people that donate and/or invest in your business often want to see a detailed plan, financial statements, appraisals and information about the central figures who are going to be involved in running the business. For startups looking towards crowdfunding, the business plan is often the key factor of your campaign's success since they won't have a track record to judge you by.
Peer-to-peer loans will be easier to get if you can show a 2 year or more business history along with your business plan. Another major difference between p2p loans and crowdfunded financing is that peer-to-peer lenders are out of your hair as long as you are paying your loan back on time. With crowdfunding, you may have to report to your donors /investors and deal with some legal obligations after you've received the funding. Your big-money investors may want detailed reports and even a seat on the board of your business to keep track of how the money is being spent and how the business is being run.
So they both have distinct difference that you need to weigh and decide on before attempting to fund your project or business, both are growing in popularity and have helped thousands of small businesses get the money they needed to expand and grow. Give them a look if you need small business funding.