Crowdfunding is, much like it sounds like, raising money from a bunch of people. Usually those people give you money in exchange for some type of compensation.
A variety of crowdfunding platforms exist to make this process easy. You’ve probably heard of popular ones like Kickstarter, GoFundMe, and Patreon. But there are crowdfunding sites for all sorts of niche needs. For example, iFundWomen specifically offers crowdfunding for (you guessed it) women-owned businesses.
Along with different platforms, there are also different types of crowdfunding. Generally, crowdfunding gets classified by the type of compensation.
Types of Crowdfunding
There are three types of crowdfunding
Equity crowdfunding
Investors can become part-owners of a project through this form of crowdfunding, which is the most popular. Investors buy equity in a project by trading their capital. Shares of profits are distributed to equity owners as dividends.
Reward-based Crowdfunding
A person invests in a property, and they expect goods and services in return. An example of this type of investment is contributing to a civic project, funding free software, etc.
Donation-based Crowdfunding
The project is approached by many investors to donate a small amount of money without expecting anything in return. A common example of a crowdfunding campaign collecting donations for a social welfare cause, COVID relief campaigns are among the most relevant crowdfunding campaign examples in the world today.
Peer-to-peer
Peer-to-peer lending is a specific type of business financing in which individual investors―not traditional banks or credit unions―provide funding to businesses.
P2P lending usually takes the form of business loans or lines of credit. And while individual investors are the ones ponying up the money, they typically do so through a lending platform (like Funding Circle or StreetShares). Often these platforms pool together money from different P2P investors to extend business loans.
Thanks to P2P lending platforms, the borrower and the investor never actually interact in most cases. The lending platform acts as a middleman. So the borrower applies, gets funded, and repays the loan through the platform.
How does p2p lending work?
Here’s how p2p lending works
Filling an application – To apply for a loan on a P2P website, a potential borrower must fill out an online application.
Assigning interest rates – The p2p platform evaluates the project, understands its credit risk, etc., and then assigns an interest rate.
Selecting investors – After the approval of the application, the platform curates ideal investors based on the business and then the list is forwarded to the borrower who can then go through the background and profile of each investor and choose.
By making a deal, the applicant (borrower) is responsible for paying back the interest periodically and repaying the loan at the end of the contract.
Differences Between Crowdfunding And P2P
| P2p | Crowdfunding | |
| Rewards And Risks | The risks associated with peer-to-peer lending are lower compared to equity crowdfunding since it offers more predictable returns. It also offers lower rewards. | P2P lending carries lower risks than equity crowdfunding, but the returns of equity crowdfunding are also higher than P2P lending. |
| Types and Nature | This type of investment is called peer-to-peer lending. Its sole purpose is to fund new companies and projects. | If you decide what kind of investment you want, crowdfunding will provide a variety of options, including reward-based crowdfunding, equity crowdfunding, and donation-based crowdfunding. |
| Duration | Investments between peers usually last a limited period of time, and the relationship ends when the loan is repaid. | An investment made through crowdfunding can be a long-term investment since the investor can hold the share as long as they desire. |
| Returns | Since p2p lending is a form of a loan with a fixed interest and return rate the investor receives their money with the interest earned within a fixed time. | As crowdfunding is an equity investment, the returns earned are open-ended. As long as the business or project thrives, the investor will benefit in the form of passive income as they own a part of the business. |
Related Article : A Guide to Different Types of Fundraising
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