What is the difference between Peer to Peer lending and Crowdfunding?

What is the difference between Peer to Peer lending and Crowdfunding?

Your business is needing funds to grow faster, and you may have heard about peer to peer (also known as p-2-p) lending and crowdfunding as an alternative option to your local bank.  Before you venture into either of these alternative funding options, you do need to know what each option entails and the responsibilities you as a business need to undertake.  Both options are very different and suits businesses at different stages of growth.  So the ultimate question then is, which method of finance would work best for you and your business?


So what is the difference between P-2-P lending and Crowdfunding?

P-2-P is the practice of a group of unrelated companies or individuals who come together and lend directly to your business.  Whereas crowdfunding is when a group of unrelated individuals or companies coming together to directly buy an equity share in your company.  So at the core it is about whether you as a business wish to borrow from a group via p-2-p lending platform or you wish to sell some of your shares to a group via crowdfunding.


What does your p-2-p lenders expect from you?

The groups or individuals who loaned funds to you expect to receive a regular fixed interest payment over the term of the loan, irrespective of any profit made from your company over same period.  Expected returns should be lower as sitting further down the capital structure, behind the equity. Therefore less risky.  P-2-P lending is FCA Regulated.


What does your crowdfunding investors expect from you?

The groups or individuals who invested in your business are shareholders/part owner of your company.  You do not have to pay dividends or any interest payments as they are shareholders.  This means any profit made in your company can be re-invested back into the company.  Conversely when your company is sold, your shareholders do expect a share of any net profits, assuming a profit has been made.  Crowdfunding is FCA Regulated.


So which option is best for your business?

Crowdfunding is a good option for start-ups and early stage businesses but there is an increasing number of more established businesses looking at Crowdfunding as one of the financing options. So if you have a great new idea for a product or service which can catch the imagination of investors, you can then pitch your idea online and if interested a group of individual can contribute a sum to invest.  Then you decide how you want to reward your investors who helped you make it happen.  You can opt for a reward-based crowdfund which means you give a unique perk, a gift to the investor.  Or you can offer equity in your business.

So to succeed in raising finance on crowdfunding platforms, you need a great business idea to catch the imagination, a business plan with financial forecasts, a strong pitch to your investors using video / text / marketing materials.  Some potential investors may even wish to talk and meet up with you to learn more about your ideas.  There are also the legal considerations that you will need to deal with and you will need to keep your shareholders updated with business progress as well.

On the other side, if you already have an established business and just want a loan without offering any equity then p-2-p lending is the one for you. P-2-P lending is a fast and easy way of getting a cash injection into your business. The main difference between this and investment crowdfunding is that you do not give away any equity, but rather pay interest on the money you borrow, much like you would with a bank. P-2-P lending is suitable for all established business, including limited companies, limited liability partnerships and non-limited companies, generally trading for at least 2 years or more.  You will need to provide your businesses financials such as filed annual accounts and reasons for why your business needs a loan. Dependent on the size of the loan, you will need to offer security such as a personal guarantee or assets can also be offered.


If you need any help with funding for your business growth, you are welcome to call Marcin Zientek on 07929446735 or email m.zientek@zientek-global.co.uk


This article does not constitute any advice. Zientek Global Ltd is not responsible for any loss or damage incurred by readers of the blog. 

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