The rapid growth in the peer-to-peer and crowdfunding sector reflects its position as a new kind of funding which is still in the relatively early years of development. It is a sector in which the UK can claim to be leading the way.
The terms peer-to-peer and crowdfunding are not simply interchangeable.
Crowdfunding is a great option for startups and early stage businesses. You pitch your idea or business to potential investors, and if interested, they will contribute a sum to the proposed venture. Then you decide how you want to reward those lovely people who helped you make it happen.
Crowdfunding in its earliest form focused on helping entrepreneurial creatives and inventors to get their creative ideas off the ground. Investors were given something in return, rather than a financial interest payment. This is what’s known as reward-based crowdfunding. Since first appearing, the concept of crowdfunding has evolved into different forms, with investment crowdfunding now starting to grow rapidly. In this model, the borrower gives investors equity in the business.
Established business are likely to find peer-to-peer lending more suitable.
It’s a fast and accessible way of getting a cash injection into a business. The essential difference between this and investment crowdfunding is that the borrower does not give away any equity. More conventionally, they pay interest on the money borrowed, as they would with a bank. Whether the loan is for a piece of kit for a factory, purchasing a property, buying stock or even for working capital, peer-to-peer lending offers an accessible and flexible way of getting finance.
Peer-to-peer loans are usually funded by a number of different people, and in some cases not just individuals but also local councils, educational bodies and even the British Business Bank Programme.
Some funding platforms allow investors to pick specific business to invest into; others spread the investment (and therefore the risk) across a portfolio of borrowers.
The returns to the investor are higher than in other investments, and ultimately of course it is the businesses that pay for the high interest returns, so this is not necessarily the first type of borrowing to consider. Some, but not all peer-to-peer platforms, insist on business having completed one year’s trading before they become eligible for a loan.