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Monday, August 11, 2014

Getting a head start in business: Crowdfunding vs. peer-to-peer lending

Small business financing alternatives
Both crowdfunding & peer-to-peer lending are subject to fees
By Harry Price 

As small businesses still suffer in the shadow of bigger companies, the U.K. government has forced  banks to lend to smaller businesses and start-ups to survive. Small and medium enterprises or SMEs are vitally important to the economic growth with nearly half of the UK’s GDP depending on them. They also employ 60% of the work force.

As the media portrays the banks unwilling to comply with the government’s request, smaller businesses are beginning to suffer, but there is hope. New alternative means of obtaining finances have opened up, which places the power to finance a business in the hands of ordinary people.

These two relatively new financing platforms are Peer to Peer lending and Crowdfunding. While they are the alternative means and oftentimes a more secure way to gain finance and funding, what is the difference between the two? What would benefit you more as a start-up business?

Peer-to-peer lending


The process is very similar to receiving a loan from a bank, but uses an online platform that moderates the process and directly lends to the borrower. This removes the middleman that is often found when applying for a loan through the bank. In essence, it is lending from one to another without a banking intermediary. Peer-to-peer works by the lending website putting you in touch with whoever wants to lend you money, while there is still an intermediary, you may find that is easier to deal with than a traditional financial institution.

This form of lending has its advantages and disadvantages for start-up businesses; it’s a faster way to secure finance with lower interest rates. The online platforms that regulate the peer-to-peer network do not demand a minimum loan amount, making them extremely beneficial for businesses who wish to borrow small amounts. One of the disadvantages of a Peer to Peer is that you still might not be able to secure a loan depending on your credit rating.

Crowdfunding


Another popular form for start-up businesses to access finances, crowdfunding is a means of raising small amounts of money for a project or business venture from a large number of people via the internet. It is similar to peer-to-peer lending in that the bank is not the intermediary, but you source the money straight from the customers you wish to provide business for. One of the benefits of opting for crowdfunding to aid your business it that it can build up a network of support for your start-up; it can also be an excellent way to raise your brand awareness by making your investors ambassadors for your business. While the benefits are excellent for start-up businesses, crowdfunding does have its downsides as well. Customers can give feedback on your campaign and if they feel that they are not being rewarded for their benefits, they will let you know about it through the website used. This may tarnish your reputation as well as have lawsuits filed against you. It can be a quick way to access finances, but you need to have a thought out and well-timed plan.

In conclusion, both forms of funding have their advantages and disadvantages. They can both benefit your start-up business, but you need to thoroughly research both, as not being prepared can have detrimental effects on the growth of your business. 




Harry Price is a free-lance writer who enjoys playing poker competitively. He spends his free time playing football for a non-profit organisation in England.




Images: 1. Geralt/Pixabay/US-PD; 2. Author owned and licensed

3 comments:

  1. from these points it is known that a person
    apply for loan with bad credit, but require to pay with time, the loan is sweet which give comfort to life many takes it to full-fill their dreams, while many take it to start business.

    ReplyDelete
  2. There are two types of short term loans in UK. One is payday loans and another is instalment loans. But both are bad credit loans. You have done a good job by writing this article. Keep it up. Thanks

    ReplyDelete
  3. it is 100% true that bigger companies in the UK overshadow small business but now time has been changed you can get loans without a guarantor and upfront charges in the UK

    ReplyDelete