Do you know the difference between peer-to-peer (P2P) lending and crowdfunding? While some businesses use a traditional loan to finance their operations, others seek alternative financing. P2P lending and crowdfunding are two of the most common forms of alternative financing. Neither of them involves traditional banks. With P2P lending or crowdfunding, businesses can obtain capital through a non-banking channel. Here’s everything you need to know about P2P lending and crowdfunding.
What Is P2P Lending?
P2P lending is a form of alternative financing in which businesses borrow money from lenders on a third-party platform. Also known as marketplace lending, it involves the use of an intermediary. The intermediary is the platform or “P2P lending platform.” P2P lending platforms are designed to connect businesses in need of money with lenders. Both businesses and lenders use P2P lending platforms to find the opposite party.
What Is Crowdfunding?
Crowdfunding is a form of alternative lending that involves seeking capital — typically small investments — from a large pool of investors. Most forms of financing involve a single investor, such as a bank or venture capitalist. Crowdfunding, though, involves many different investors. There are often hundreds or even thousands of investors for a typical crowdfunding project.
Differences Between P2P Lending and Crowdfunding?
While they are both classified as forms of alternative financing, P2P lending and crowdfunding aren’t the same. One of the ways in which they differ is the structure. P2P lending is structured as a loan. With P2P lending, you can borrow money from a lender, which you’ll be required to pay back with interest. Crowdfunding uses a different structure. It’s not a loan. Instead, you can offer rewards to investors or equity to investors.
Another difference between P2P lending and crowdfunding is that the former involves a single investor, whereas the latter involves multiple investors. With P2P lending, you’ll partner with a single investor using a P2P lending platform. With crowdfunding, you’ll partner with many different investors, potentially thousands of investors.
Investors have different levels of control with P2P lending and crowdfunding. P2P lending allows investors to control their portfolios. Crowdfunding, in comparison, provides investors with influence over decision-making.
P2P lending and crowdfunding are used for different purposes. P2P lending is used for general-purpose business loans. Crowdfunding, in comparison, is used for startups, new projects, charities and other, more specific types of financing projects.
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