Crowdfunding VS Crowdlending VS P2P Lending
The sharing economy is profoundly disrupting the traditional financial system. Alternative and collaborative finance is an unstoppable trend across the globe and we hear more and more of P2B and P2P crowdfunding.
P2B and P2P crowdfunding have experienced tremendous growth thanks to increased connectivity of people with a want to become more efficient, profitable and democratic.
With the background of soaring alternative finance demands in the European Market, today we will shed some light on the distinction between P2B and P2P, as applied to crowdlending.
A definition of crowdlending
Crowdfunding allows projects be financed directly by a large group of people, the “crowd”, without resorting to the services of a traditional bank or other financial institution. In crowdlending, a large number of unrelated people lend directly small amounts in exchange for a financial return, through a commercial loan agreement. Crowdlending is also known as debt crowdfunding, crowdfunding of loans or P2B and P2P lending.
Now then, what’s the difference between P2B and P2P crowdlending?
To begin, P2B is peer-to-business.
It is a method of debt financing that enables individuals to lend money to enterprise projects of any scale—bypassing an official financial institution.
Traditionally individuals didn’t get direct access to enterprise projects. The only way one could access them was through investment funds. These official transactions are issued by financial institutions—without specifying how the capital is allocated or on what.
If that sounds a little speculative, it should. Not only does an individual have no say in the allocation of his or her own capital, but there are no concrete projects to be seen or touched.
It is precisely for these reasons that P2B crowdlending revolutionizes our world of finance. P2B is about financing the real economy as opposed to speculation.
What does P2B offer to the world?
As was previously stated, P2B finance allows anyone to rapidly invest in enterprise projects.
The loans generate income as interest for the lenders. Most importantly, the interest is significantly higher than traditional banking investment products—between 10 to 50 times higher!
P2P stands for Peer-to-Peer.
This form of crowdlending enables people to lend their money to other individuals, matching borrowers and lenders directly. The loans issued often include many tiny slivers from different lenders.
Similar to P2B, P2P crowdlending quickly connects borrowers and lenders together, bypassing traditional banks. Lenders get a higher interest rate than they would from a bank savings account and the borrowers can raise a loan quickly, efficiently and without any additional requirements.
P2P crowdlending platforms promote and raise funds for smaller, individual projects or ideas such as renovating a house or publishing a book.
What does this mean for banks?
As big banks retreated from lending after the 2008 financial crisis, P2B and P2P crowdlending have stepped in to fill a gap with direct collaborative financing towards real projects by individuals or companies.
The P2B and P2P platforms sprouting across the globe show evidence that lenders are more than eager to invest in projects that demonstrate profitability and tangible benefits to society and the environment. No matter your choice of investment, P2B and P2P finance are the logical next step in democratising lending.
How is Crowdlending different than P2P (Peer to Peer) lending?
Same, but different
On the surface Crowdlending and P2P are the same – many individuals pooling their funds together to fund a loan for another individual (or a business). That is the theory, anyway.
In practice, P2P is not what it used to be. There is little peer left in the P2P lending. Nowadays, more money in the lending pool comes from hedge funds and banks then individual investors. The investors don’t know the borrower, so they rely on the platforms for credit assessment. The platforms also don’t know the borrower, so they use credit algorithms. You are back to square one – pleading with a machine or with a loan officer that doesn’t know you or your business.
Can crowdlending help me start or grow my business?
Yes! If your business is just starting, or has less than 2 years of operations, there are benefits to seeking a loan through crowdlending than on P2P platform. In Crowdlending, you appeal to people that know and trust you. Your customers and community know your day-to-day operations, and your friends and family are more likely to take the time to understand your business. They have an insight that automated P2P credit algorithms fail to consider.
Is P2P even an option for funding my business?
This much depends on your personal credit. Since P2P allows you to take a personal loan to use for your business, naturally the focus is on you, not on your business. If the business fails, you are still responsible for the loan.
How about P2B (Peer to Business)?
Unlike P2P, the P2B platforms in the US are just now starting to open up. The platforms that do exist all have slightly different models. One common feature that sets them apart from Crowdlending is that the platform acts as a “gate keeper” by vetting out projects. Quite often, minimum operational history or asset coverage would be required. Examples of P2B are FundingWonder (working with accredited investors only) and NextSeed (intrastate crowdfunding in Texas).
One of the big differences between peer-to-peer fundraising and crowdfunding is the “center of gravity” of each campaign type. P2P campaigns can be thought of as our solar system, with the charity-led event as the sun in the middle, and the planets representing fundraisers, or fundraising teams, orbiting around. In contrast, crowdfunding campaigns look more like the Milky Way, comprising many different stars (causes), each with their own solar systems. In this model, there are a diversity of fundraising campaigns that are collected on a single fundraising platform. Crowdfunding campaigns tend to be bottom-up, while P2P campaigns tend to be top-down.
Crowdfunding usually refers to an effort to pool money for a campaign or initiative from people online. In a traditional crowdfunding campaign, an organization sets up a central campaign page that acts as a central hub on their non profit website. Then the organization works to drive traffic to that page through inbound marketing strategies in hope that visitors will engage with the website, take action, and become donors.
The target audience of crowdfunding and capital campaigns usually includes the organization’s donor base but also individuals on the web. Because the internet is this such a vast community that connects millions of people daily, the potential of increasing your network through crowdfunding is limitless. In fact, 72% of donors who give in crowdfunding campaigns are first time donors. Granted that you have a donor retention plan in place, you’re almost guaranteed to see growth in your network.
When to run a Crowdfunding Campaign?
Your organization can run crowdfunding and peer-to-peer campaigns simultaneously, but there are times when one method of fundraising may make more sense over the other.
You’d likely decide to run a crowdfunding campaign if you need to:
- Create a dynamic, beautiful general donation page
- Design specific landing pages that cater to different segments of donors
- Run a campaign for a specific day, such as a national awareness day or #GivingTuesday
Peer-to-Peer Fundraising Campaign
Compared to a traditional crowdfunding campaign, peer-to-peer fundraising campaigns have the power to reach a larger audience because individual supporters solicit their networks for donations. These campaigns can serve as time-based initiatives or a year-round fundraising opportunity.
The main purpose of a peer-to-peer page is to call supporters to fundraise on behalf of your organization. While there is also an option to complete a one-time donation, the goal of the page is to recruit individuals who will appeal to their personal networks.
Instead of Impact Levels that depict the significance of a single donation amount, the Impact Levels on Classy’s peer-to-peer landing page convey the impact an individual could make as a fundraiser.
When to run a Peer-to-Peer Fundraising Campaign
You can run time-based peer-to-peer campaigns, create a year-round fundraising option that allows supporters to dedicate their life events, or run both simultaneously.
These peer-to-peer fundraising campaigns can serve to:
- Leverage the network of your supporter base to raise more money
- Tap into the network of certain key influencers, such as brand ambassadors, celebrity supporters, or board members
- Give donors a year-round option to raise money on behalf of your organization for different life events, such as birthdays or weddings
To really make P2P campaigns successful, you’ll need to teach your supporters how to fundraise for you. That means you will not only have to educate your supporters to use your P2P platform but it could also mean a lot of hand-holding and coaching throughout the process.
Additionally, P2P fundraising does not have the same potential for network growth and donor retention as traditional crowdfunding does. Don’t get me wrong, the potential is there. It’s just not the same kind of potential.
The target audience of a P2P campaign is not the general community of the internet but rather your networks’ networks: your supporters’ friends and family. Because the campaign will be focused on specific group of individuals, it’s less likely to reach as many people as a traditional crowdfunding campaign.
Crowdlending can be defined as a direct loan from customers directly to our public limited company that is paid back with interest.
How does crowdlending work?
It is quite simple really: a private person gives a company a private loan and is paid back with interest. There are no middlemen, so there are no extra fees or additional costs for you. You set the conditions or negotiate them with your lender.
How do you draw people’s attention to your company?
We are lucky because our product has been on the market for 3 years now and already achieved a certain level of recognition. It was therefore enough to publicize the investment options on our blog and via our newsletter. People could download a 3-page PDF that detailed the investment options available. We then sent our business and financial plan to those who expressed a real interest.
This is the best example of how important it is to encourage people to subscribe to your newsletter and provide exciting updates about your work right from the very start. Creating a community of interested people around your project or company is an investment that will ultimately pay a variety of dividends.
Why Crowdlending instead of VC investment
There were two major reasons. The first is that we did not want to give up any control of our business decisions. This was very important because we focus on a holacracy and non-violent communication, two perhaps unusual approaches to business management. We don’t have bosses who bang on the table or raise their voices. This makes us a much better and more efficient company, but many classic investors see “self-organization” as the equivalent of “chaos”, even if our experience has been the exact opposite.
A venture capitalist who wants to get involved and exert control could do a lot of damage. We also wanted to retain the right to make business decisions that might limit profit, but improve our social or ecological impact. Like manufacturing our product completely in Germany, even if that is more considerably more expensive.
The second reason is that having shareholders means you have to expand. Venture capital funds invest in a company because they expect to be able to sell their shares for considerably more in a few years – for at least twice to as much as ten-times as much as they originally paid. The anticipated price increase is always based on how much profit you are likely to be making and sharing in the future. You have to grow a lot in a very limited time for the value of your shares to increase that much. Plus venture capitalists generally want to secure fairly comprehensive control rights, even if their involvement is rather limited, to reduce their risk. Even though of course this depends on the investor and the rights you negotiate.
What are the risks of crowdlending?
For you as a company, the risks are relatively small. You are not liable for the money (assuming the legal structure of your company has limited liability), nor do you have to surrender control. This is why the crowdfunding law was passed to strictly regulate this type of financing. This does not, of course, mean you have the freedom to handle the money invested irresponsibly. Our private investors have placed their trust in us, and their generosity makes us feel even more responsible to do everything we can to make sure they get the promised return on their investment.
We also made sure they understood that their money would be gone if we went bankrupt before they agreed to invest in us, and that they should only invest if they could afford to lose their money if that happened. Once these fronts have been clarified though, crowdlending is one of the nicest kinds of financing. Your community, the people who know your products, and value your work and the mission behind it, trust you enough to invest a large sum of their hard earned money in your success.
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