Introduction to Crowdfunding and Peer to Peer Lending
Crowdfunding, otherwise known as Peer to Peer lending or P2P was originally launched in the USA and has recently seen an enormous increase in popularity as a source of business funding. Following the 2008 credit crunch, lenders tightened their purse strings, giving space in the market to the crowdfunding concept, and allowing access to funds which might otherwise have been out of reach.
Although still a minority source when measured against other sources of funding, its growth looks likely to continue at the same swift rate as it has been in recent years. Here, we look at what it is, and more to the point, how businesses and individuals can make the most of it.
Crowdfunding is mainly internet based, and allows individuals (the crowd) to combine their financial resource to support endeavours. The initiatives funded can be at any stage of their development, and it’s not just restricted to business – it’s been historically used for example to support charities, research, bands, individuals, medical procedures – the list goes on.
Crowdfunding works by a large number of people each giving a small amount of money, thereby raising the finance needed. Prior to crowdfunding, businesses, ventures and projects might ask a small number of investors for a larger sum. Crowdfunding uses the strength of numbers provided by the internet and social media to allow a critical mass to be reached. It is therefore considered more achievable – the internet helps pitchers to reach hundreds, thousands, even millions of people.
There are a number of Crowdfunding / P2P websites in existence, with new ones launching on a regular basis. Given the meteoric rise in popularity of this kind of funding, sites are becoming increasingly more sector-specific. Those seeking funds establish a profile on the sites and provide a breakdown of their requirements. The ‘crowd’ then decide whether to support the project.
There are typically three different forms that crowdfunding can take – these are equity, debt and donation.
Equity crowd funding sees individuals paying for a small equity stake in the business or venture. They then own shares in it, which like any shares, can go up or down in value. There are specialists (sometimes known as ‘angels’) who concentrate on businesses at different stages, with some preferring to take equity in established and growth businesses as opposed to start-ups. A google search will display numerous options for project managers to consider, all depending which stage they are at in their development.
As the name suggests, this involves investors providing loans with a view to getting their money back with interest added. This allows individuals and businesses to pitch to get access to funds without having to approach the more traditionally used banks.
The government has been known to provide a large amount of money to facilitate this kind of crowdfunding / P2P lending. One main site that has taken advantage of this is Funding Circle, which is now a well-respected and well known source of business development funding. Other smaller debt-based funders are also in operation, and all have a slightly different way of lending funds, some of which include asset-backed funding (lending against a Director’s house for example), invoice discounting (lending against as yet unpaid invoices), bridging finance (when funds are promised on the horizon), and personal lending.
This type of crowdfunding sees investors part with their money simply because they believe it’s worthwhile. High profile cases of this type of crowd funding are regularly seen in the press, for example the case of Charlie Gard, whose parents raised well over a million pounds to fund pioneering surgery to save their son. Charities often create donation crowdfunding campaigns.
Some sorts of donation funding offer a reward, such as an acknowledgement, or tickets, or gifts, but largely those contributing do so from an altruistic perspective – their own personal emotions or beliefs in a project or cause promoting their donation.
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