How Peer To Peer Lending Is Different From Crowdfunding?

peer to peer lending

Over the past few years, borrowers found it challenging to secure funds from mainstream lenders or banks. Primarily, it became a significant problem for small businesses, which have arguably suffered since the financial crisis in the UK. However, many of these borrowers have managed to get funds to fulfil their financial needs. This is by using alternative finance options like peer to peer lending and crowdfunding.  

Crowdfunding and p2p lendings are exciting ways for investors to invest money and accessible choices for borrowers to get funds. Both of these platforms operate online and provide a reliable funding source away from banks’ strict lending criteria. Both of these methods have a lot in common, which is why many people think that these are the same. However, borrowers and investors need to understand the difference so that they can decide which one is better for them. 

What Is Peer To Peer Lending?  

For centuries, people have been lending money from one another on their terms and bypassing the banks or high street lenders. This simple method now comes with some tweaks to protect both the investors and borrowers. Peer to peer lending is a way of lending in which you do not need to go to a bank and can borrow money directly from the investors. All this process takes place through online p2p platforms. You can make an online application and get quick access to funds. On the other hand, investors can also manage their platform from anywhere and get higher returns than traditional bank loans. 

What Is Crowdfunding?

Crowdfunding is a way of financing in which finance is raised for a wide variety of projects and businesses. It allows fundraises to collect funds from a large number of investors through online platforms. As a result, crowdfunding has become one of the common funding routes for startups and small businesses. Investors can choose a project they want to fund, and in return, they will get equity in the business.  

Firms that raise funds through crowdfunding also offer extra benefits such as a free product as a gesture of maintaining a healthy and long relationship with the investors. The advantages offered to investors can vary depending on the project they are funding.  

Similarities In P2p Lending And Crowdfunding

On the surface peer to peer lending and crowdfunding seems pretty similar. There are many similarities, such as in both ways of lending, multiple investors contribute to a single loan or fundraise, and both are gaining popularity as alternative funding sources. They allow borrowers to get funds without approaching banks and passing through lengthy paperwork. Both crowdfunding and p2p platforms operate online. 

These two platforms provide a new way for investors to invest money and get more returns. These platforms are designed to be more accessible and less technical than conventional investment platforms like stock and bonds. Investors who are looking to diversify their investment portfolio can add p2p lending or crowdfunding to their portfolio and earn suitable returns.

Differences Between P2p Lending And Crowdfunding

Here we are describing some differences between p2p lending and crowdfunding that will help you to eliminate any confusion about these two investment options:

  • The most significant difference between p2p lending and crowdfunding is that p2p lending is a loan based while crowdfunding is equity-based. Most p2p platforms offer fixed rate returns, and sometimes the target rate is given. In contrast, the equity of a business highly depends on its performance, so the returns of crowdfunding are variable. Similarly, p2p loans have fixed terms where borrowers have to repay the loan amount after a set amount of time. In crowdfunding, there is no end date, and it’s up to investors that they can hold to their equity for how long. 
  • Another difference between these two investments is due to the relationship between borrowers and investors. In p2p lending, investors can get details like the borrowers’ credit history. Still, the identity of borrowers is hidden, which means there is no direct relationship between lenders and borrowers. Instead, P2p platforms carry out due diligence, and investors use this information to select borrowers and decide whether investing money in p2p loans is beneficial or not. In crowdfunding, investors have a direct relationship with the borrowers and investors conduct their own due diligence. This relationship is much close, and both the parties can get benefit from the borrower’s performance. 
  • P2p platforms offer a wide range of loans and p2p platforms pool capitals of multiple investors and then spread it across multiple borrowers who are usually anonymous.    

Conclusion:

From the borrowers perspective, we find that as a borrower, you have to pay interest in p2p loans whereas giving away equity in crowdfunding. In p2p lending, the interest you pay is distributed among the investor and the platform through which you borrow money. If you do not repay the loan on time, you have to pay late repayment charges, and in case of default, there is a risk of repossession of your security.

Now that you know the differences between Peer To Peer Lending UK and crowdfunding. It can be better for you to decide which one suits your investment goals. Moreover, if you are a borrower, you can select any of these alternative finance options that meet your requirements. All the investment options and financial products have their benefits and drawbacks that you should consider when choosing one for yourself. 

You must keep in mind that there are a number of p2p and crowdfunding platforms present in the UK. So when it comes to choosing a platform you must do research and shop around to find the best platform.

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