riaro19 ‘The Diference Between Crowafuning and P2P Lending -Fleximize How Does Crowdfunding Differ to P2P Lending? Many people lump crowdfunding and peer-to-peer lending together, but there's an important distinction between these two types of business finance BY PAUL MARSTON Crowafunding and peer-to-peer lending are often regarded as one and the same, and its easy to See why: they both involve people coming together to provide financial support for something. In reality, however, they are very different beasts. What is crowdfunding? Cone of the reasons wny peopl confuse crowdfunding wth peer-to-peer lending is thatthe word ‘crowetunding is often used asa catchall term for many diferent financial activities, Fr the purposes ofthis article, well be Using crowafunding to refer to two speci ypes of finance: equity crowdtunding and reward-based croweltund ng. Wellthen take a look at how these two compare to peer-to-peer lending Reward-based crowdfunding You've probably heard of reward-based crowdfunding on websites lke Kickstarter, where someone with a project, ‘such as launching a niche recipe book, looks for lke-minded incividuals who can help fund that project (for example, to cover the printing costs) In return, they! usually get some forrn of reward: In this case it might be a signed copy of the book or an acknowledgement in the introduction. ‘The crucial point here is that i's not really an investment in the conventional sense: an investor is funding a our se uses BES BH WOH RARSEUNR 8 HNANGS SUN, SPEIRS LoGUOR Lor Ans Beales e,SYSSESS OU Ney Se SA Se seins Cherie wegsnorloseenogey elena rls sets eet Geom rane) hps:Mleximize.comiartcles\00077S/crowatunding-and-peerte-peerending 7riaro19 ‘The Diterence Between Crowatundng and P2P Lending - Floximi2e Equity crowdfunding Equity crowafunding is closer to an Investment in shares ~ also known as equities, hence the name. Typialy people with either a young business, or maybe even just an idea, raise money inorder to grow that business. The people and institutions who fund businesses through equity crowdfunding get a stake inthe business it might fal In which case the investor ould lose their investment, or i might prosper in which case the investor could be Inline fora tay return, From the point of view of the business seeking funds, there's a clear advantage this model: if the business does fall its shares are simply worth nothing, and the business owners would not need to repay anything. Not so good for the investors, but then they have 1¢ prospect of substantial returns ifthe business comes good, What are the risks of crowdfunding? For investors, the primary risk of equity crowafunding is that the business they've backed ray fall in which case its likely that theyIl lose all of their investment. There are her things to bear in mind too - while it's relatively sy to sella share ina listed company such as Apple, shares In smaller, early-stage companies are notoriously liquid and subject to volatility, This means investors might find it difficult to access their money alter its been Invested CROWD CONTROL: Investors should consider the risks of crowdfunding Defore jumping in What is peer-to-peer lending? Peer-to-peer lending is a different model: rather than owning a stake in a business, investors’ money is matched, via an ontine platform, ta loan for a person or business. Aloan is very different to equity it's a specific amount of maney, repaid over a defined term, and investors earn a return via interest payable on the lean, ur seuss equi i i thansrsHal reese re Hsien SercrenyeerseremaesRata see, EES Ue ot colle etre. ‘ese well eens ye hapoyo anne eoode okey eoetnge Pesto Tacltated £14 bon of loans, but no investor has ever lost @ penny ~ although this is nota guarantee for 1 future. On average, its investors have earned a return of 4.7% hitpstMeximize.comlatclesi000772Verowdunding-and-peer-to-peetlending 24riaro19 ‘The Diference Between Crowafuning and P2P Lending -Fleximize Peer-to-peer lending platforms may specialze in lending to certain types of borrower ~ individual, businesses or property businesses - or may diversify acrass borrower types, What are the risks of peer-to-peer lending? “The main risk when lending money is that the berrower doesn’ pay it back, To help investors deal with this isk, some peer-to-peer platforms offer features such as a Provision Fund, which take contributions from borrowers as part of their loan, and step in in the event of a missed payment. However, the bottom line is that this stillan investment, and peer-to-peer lenders cannot guarantee that investors’ money will always be safe. Peer-to-peer lending vs. crowdfunding Comparing the two models, equity crowdfunding is higher risk, but it could be argued that the rewards on offer reflect this, As a result, equity crowefunding platforms tend to be aimed at sophisticated investors, Le. people vith a very high level of financial knowledge, as well as a good understanding of early-stage businesses and the risks involved, Peer-to-peer lending provides more predictable returns, and both the risks and returns are comparatively lower. Obviously this guide is just an overview, and if you start to look at specific platforms, youll find that there are dozens of permutations of the models outlined above, each with its own strengths and weaknesses. About the author Paul Morston is head of commercial divisions at RateSeter(heps:/hwww.ratesetter.com/? ttm, source=fieximizedutm.medium=referralautin.campaign=crowdfunding article), a peerto-peer lending platform ‘hat matches investors with creditworthy businesses and consumers throughout the UK. Marston has a wealth of ‘experience within SME finance, having previously held senior positions at RBS and Secure Trust Bank. 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