If you are looking to raise financing for your small business or startup, there are a lot of routes you can explore. Two of them include crowdfunding and peer-to-peer financing. Generally, both financing models are well-suited to grow and develop SMEs. Where people make the mistake, however, is in believing that both funding models are one and the same. They are actually quite different. And such misunderstanding affects the funds received because there are some essential differences between crowdfunding and P2P Financing. So, which one is the best for your business?
Crowdfunding and P2P Financing share one common principle, which is raising finance from a number of individuals or investors who pool together finances via an online intermediary. Both are non-bank alternative financing models that are suitable for SMEs. In fact, P2P Financing is one of the categories of crowdfunding. That’s probably why some people find it difficult to differentiate the two.
The essential difference between crowdfunding and P2P financing is the way funding is returned to the investors. With crowdfunding, issuers or project initiators will repay investors with rewards (commonly in the form of company product) or equity of the issuer’s company. With P2P Financing, issuers repay their financing to investors in a similar fashion as bank funding. The issuer of P2P Financing will have to repay the investors’ investment plus interest. Typically, the repayment is done monthly.
To understand which model will be suitable for you, you need to learn about the benefits given by both financing models. The benefits of crowdfunding are:
- The issuer (or crowdfunding project initiator) will gain access to a marketplace of supporters and regular backers. But you do need to promote your project or company to attract investors;
- Typically, an issuer doesn’t need to worry about technical aspects such as payment processing etc. Their chosen crowdfunding platform takes care of that;
- Usually, crowdfunding platforms have in-depth analytics which will give you an idea which rewards are the most popular and where people will find your project online;
Meanwhile, the benefits of P2P financing are:
- Fixed repayment rate;
- Easy to apply online, since most P2P financing platforms are operated virtually;
- Issuer doesn’t need to have collateral, which makes P2P Financing an excellent choice for small businesses;
- The financing that you need will be deposited right into your bank account;
- Fast financing. Issuer doesn’t have to wait too long to get financial support.
It’s your call whether you choose crowdfunding or P2P funding to finance your business. As long as the method is suitable, go ahead. You know best.