The Difference Between Peer-To-Peer (P2P) & Crowdfunding

P2P lending and crowdfunding have something in common, they both involve obtaining funds online from a group of people, or investors. However, the most important distinction between crowdfunding and peer-to-peer lending, is how you repay your investors.

When you compare both P2P and crowdfunding, equity crowdfunding has a higher risk, but it could be argued that the rewards on offer reflect this. Peer-to-peer lending provides more predictable returns, and both the risks and returns are comparatively lower.

While crowdfunding in its classical forms has more risks than P2P lending, it requires investors to make well-informed decisions more sophisticated. This model is diverse and offers different financial schemes like donations, rewards, or equity deals. On the other hand, P2P lending is less risky and gives more explicit promises on returns. However, it compels borrowers to fulfil their obligations earnestly.

What is P2P?

P2P practices usually occur on third-party platforms that essentially function as matchmakers connecting lenders with borrowers. Through this service, investors can lend money to businesses or individuals seamlessly, based on preferences and requirements agreed by both parties. It has quickly become a financing trend in Singapore.

Many see P2P business lending as a quick and easy way to get funds to empower company initiatives. The lending practice differs from crowdfunding whereby you do not give away any equity and instead pay interest on the money you borrow, similarly to a bank loan. P2P lending platforms could specialze in lending to certain types of borrower like individuals, businesses, or property businesses, it may diversify across borrower types.

The biggest risk when lending money is that the borrower doesn’t pay the money back. To avoid getting this risk, some peer-to-peer platforms offer features like a Provision Fund, which take contributions from borrowers as part of their loan, and step in in case of a missed payment. However, the bottom line is that this is still an investment, and peer-to-peer lenders cannot guarantee that investors’ money will always be secure.

Thanks to the internet, there are now digital platforms in the country and around the world which helps expand the number of people you can borrow from. This also means that funding can be obtained within 1 to 2 weeks of submitting your request through P2P financing.

What is crowdfunding?

One of the reasons why many confuse crowdfunding with peer-to-peer lending is that the word ‘crowdfunding’ is often used as a term for many different financial activities. Crowdfunding consists of a large group of people offering to fund a particular project or venture.

Crowdfunding is a type of financing that is suitable for startups and early-stage firms because it doesn’t demand monthly repayments like a bank loan. As an alternative, you are also able to distribute your business’s equity or release the final product as a donation.

For investors, the primary risk of equity crowdfunding is that the business they’ve backed may fail, in which case it’s likely that they’ll lose all of their investment. While it’s relatively easy to sell a share in a listed company such as Apple, shares in smaller, early-stage companies are notoriously illiquid and subject to volatility. This means investors might find it difficult to access their money after it’s been invested.

How are they different?

Many people lump crowdfunding and peer-to-peer lending together, but there’s an important distinction between these two types of business finance. They both involve people coming together to provide financial support for something. However, they are very different options.

Crowdfunding provides several benefits, including the ability to borrow money without having to repay it, but it isn’t suitable for all kinds of businesses. Businesses that do well on crowdfunding sites have interesting, one-of-a-kind things that consumers may purchase. Furthermore, creating a convincing campaign around a product is frequently easier than creating one around a service. Just take note that most people are seeking something fresh and exciting. If your product is something seen in a local store, you are not going to have much luck with crowdfunding.

Unlike crowdfunding, a P2P loan can be obtained regardless of the sort of business. You may be eligible if you sell goods. That is because P2P lending is based on your personal and company history, and not on how flashy your business or your ability to develop engaging marketing. However, this means that P2P lending will not be as effective for start-up businesses.

That said, businesses with poor credit may find it difficult to obtain a P2P loan. You can’t persuade a lender if you don’t meet their revenue or credit requirements. At least crowdfunding gives you the option and chance to persuade your audience. Nevertheless, for many businesses, peer-to-peer lending is more accessible than crowdfunding.

Which option should you choose?

Both methods of investing offer rewards, and risks, so knowing the mechanics of each allows investors to make the better choice for their needs. As an entrepreneur, it’s important that you capitalise on the financing opportunities that are best suited for your business. Consider the primary factors, like whether you are offering a service or product, which markets you intend to target, and whether or not funding is worthwhile at this point in your business journey. Either way, accessibility to various alternative and fairly low-risk financing methods like P2P lending and crowdfunding are choices to seriously consider.

For fast, transparent, competitive rates, try SmartFunding for borrowers, a regulated online financing platform by MAS, with a license in dealing in securities and investment advisory.

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