If you are an entrepreneur is desperate need of funds to start or grow a business, crowdfunding and peer-to-peer lending (P2P) offer alternatives – but which is best for your business?
Crowdfunding and peer-to-peer lending are similar business models, but with very different implications for cash flow and profitability.
Which is best depends on the type of business you run, where that business is sitting in the life cycle and whether debt or equity funding is the best bet for funding.
Startups generally look to crowdfunding as raising the cash has no impact on cash flows of a business making little sales or still in the R&D phase.
Got the T-Shirt
Typically, crowdfunding offers two options to investors:
- Rewards for donations, so if someone likes your pitch than can offer a donation in return for a discount, T-shirt, web site mention or other small gift
- Shares for cash – Entrepreneurs looking for finance for a business rather than a simple project can give away shares in the business in return for investment cash
Peer-to-peer lending is a different beast from crowdfunding.
Peer to peer finance is debt funding. Entrepreneurs borrow money from an online platform and pay interest and capital back out of cash flow over a fixed term – generally three to five years.
So, crowdfunders and peer to peer lenders gather their finances in the same way –by setting up online platforms collecting small amounts of cash from investors to pool into larger amounts to pass on to entrepreneurs.
Alternative finance
Although both are alternative sources of finance for small business, just turning up does not mean the cash will flow into the entrepreneur’s bank.
Like banks, crowdfunding and peer to peer lending platforms will want to see detailed project appraisals, financials and a business plan along with a profile of the key people running the business.
Where crowdfunding is for startups, peer-to-peer lenders will be more forthcoming for small businesses that can show a two year or more trading history.
Once you have the loan, peer-to-peer lenders will leave you alone, providing you make the repayments.
Crowdfunding has more legal hoops to jump through, and depending on the amount of cash involved, larger investors may well want detailed due diligence and even a seat on the board to see how their money is spent and that the business is on track.
