In the past decade, peer to peer lending and crowdfunding has become trendy ways to fund individuals and businesses. Both these funding sources have several things in common. That is why many individuals consider them the same things. However, they are different from each other, and the most significant distinction is how you repay your lenders or investors. When we compare these two famous funding sources, equity crowdfunding seems riskier, but it offers better rewards. On the other hand, p2p lending offers predictable returns, and both risks and returns are lower from crowdlending. In this article, we are going to describe the differences between these two funding sources.
What Is p2p Lending?
Peer to peer lending is a way of borrowing or lending money without involving any bank or traditional financial institution. Instead, it occurs through third-party platforms that act as intermediaries and match investors with potential borrowers. These platforms operate online and offer several benefits to lenders and borrowers. Through this service, investors can lend money to individuals or businesses based on requirements and preferences agreed by both parties. Due to its benefits and flexibility, it has quickly become popular in the UK.
Most individuals see p2p lending as an excellent source and an easy way to get quick access to funds. It differs from crowdlending as you do not need to give away any equity. Instead, you have to pay interest on the money you borrow. Peer to peer platforms specialize in different types of loans such as personal loans, business loans, and property loans. This way, it allows investors to diversify their portfolios. In addition, investors can invest money through IFISA (Innovative Finance ISA) to get tax-free interest from p2p loans.
When you invest money in peer to peer loans, the biggest risk is when a borrower fails to repay the loan amount. Many platforms offer provision funds that provide a cover against the borrower’s default to avoid this type of risk. However, if multiple borrowers default at the same time, there is no use of provision funds, and you can lose all your money. So, in the bottom line, we can say that peer to peer platforms can not guarantee that your money is always secure, and it carries some risks like all other investments.
Thanks to the internet and this innovation in the financial sector that expands the number of people you can borrow money from. It also reduced the time of securing a loan, and you can get funds within 1 to 2 weeks after submitting your application to a p2p platform.
What Is Crowdfunding?
People confuse crowdfunding with p2p lending because the term crowdfunding is used for different financial activities. It consists of a large group of investors offering funds for a particular project or business venture. This type of financing is perfect for startups and small businesses who can not afford to make regular bank or standard business loans payments. With crowdfunding, you can borrow money and give away equity in your business or donate a product to the investors. It has different types: equity crowdfunding, donation-based, royalty-based, debt-based, and reward-based crowdfunding.
The primary risk in crowdfunding is that the business you have backed may fail, and you can lose all your investment. It is easier for investors to sell their shares if they have invested infamous companies. However, small and early-stage companies’ shares are illiquid and have less volatility. So it is difficult for investors to get access to their money once it is invested.
How P2p Lending Differs From Crowdlending
Many people think crowdfunding and p2p lending are the same terms, but there are many significant distinctions between them. Although both of them involve investors coming together to provide financial support to individuals or businesses looking to borrow, they are different from each other.
Crowdfunding offers several benefits, including the opportunity that borrowers can take out money without having to repay it, but it may not suit all kinds of businesses. Businesses that are using crowdlending as a finding source are interesting one of kind products that consumers can purchase. Furthermore, it is easy to create a convincing campaign around a product instead of a service. Just be mindful that investors are likely to invest in something fresh and exciting. If your product is something that can be seen in the local market, you are not going to get much benefit from crowdfunding.
On the other hand, you can get funds through p2p lending regardless of the sort of business. You can get a loan even if you sell goods because peer to peer platforms are concerned about your personal or company history and not how efficiently your business can develop an engaging market. On the other hand, it can be difficult for you to get a p2p loan if you have a bad credit score or do not meet the requirements of the lenders. It depends on the requirements of individuals and businesses; some find p2p more accessible while others go for crowdfunding.
Which Option Should You Choose?
Both methods of investing carry their risks and rewards, and by understanding their mechanisms, you can make a better decision to invest your money in one that meets your investment goals. Peer to peer lending UK is an excellent alternative investment that allows you to get high-interest rates compared to traditional investments. With crowdlending, you can become a shareholder in a business you have backed. However, if the business does not run successfully, you may lose all your investment.
If you are a borrower, you may also find it challenging to choose one from p2p lending and crowdlending. You should always go for an option offering you less interest rate and flexibility in repayments. If you want to take a personal loan or own a service-based business, then p2p loans can be the perfect solution for you. However, crowdfunding can be best suited for your business if you have a product-based business. No matter which one you choose from, you should always select a well reputed and FCA-authorised platform to avoid any later problem.