Crowdfunding & Peer-to-Peer Lending

The World Bank has predicted the Crowdfunding industry will be worth $95 billion by 2025 and Goldman Sachs said in a report $1.2 trillion of opportunities could be addressed by Crowdfunding in the coming years. 

Crowdfunding is one of the foremost fintech innovations and is set facilitate cultural as well as economic transformations.

Side-stepping traditional finance

Crowd-based funding sidesteps traditional financing methods such as banks and private equity to give investors of all levels the opportunity to invest in exciting young start-ups and growth companies.

Crowdfunding and Peer-to-Peer are similar in as far as finance is raised outside of mainstream channels but they do have fundamental differences.

Equity and Debt Crowdfunding

Crowdfunding comes in two forms; debt and equity.

Equity Crowdfunding is where an investor receives shares in a business in return for their investment. The investor is typically aiming for the company to start paying significant dividends or for the company to be sold at a higher valuation.

Debt Crowdfunding

Debt Crowdfunding often comes in the form of mini-bonds which pay interest to those who lend the company money.

Unlike Equity Crowdfunding, Debt Crowdfunding doesn’t provide the investor with a stake in the company so investors are not eligible for any dividends or any proceeds from the sale of the business.

Debt Crowdfunding is fundamentally the same as Peer-to-Peer Lending apart from the methods it is marketed and the parties involved in the investment.

Debt Crowdfunding is largely promoted as such by platforms traditionally specialising in Equity Crowdfunding and will tend to have a ‘crowd’ of people invest.

Peer-to-Peer Lending 

Peer-to-Peer Lending (P2P) facilitates lending to both companies and individuals.

The businesses or individuals who are borrowing the money are rated by the platform and the interest rate the investor receives reflects the risk of lending to that individual or business.

High Returns

The attraction to Crowdfunding comes in the form of higher than average returns than traditional methods of investing.

Taking Equity Crowdfunding as an example, investors are investing in early stage companies and providing seed capital.

By investing in early stage companies by Equity Crowdfunding, investors are seeking high returns when that company is eventually sold or listed on the stock market at many times the valuation at which they invested.

Camden Town Brewery raised £1.5m in Equity Crowdfunding in July 2015, valuing the business at £28m. By December the company had been bought by AB InBev for £85m, netting investors a healthy return.

Risks

High returns, of course, come with a risk. Not all companies will make it to a flotation or trade sale so the investor’s capital can be tied up for years or even lost if the company fails.

Bank beating yields

Peer-to-Peer Lending interest rates can far exceed those offered by banks or even high-yielding stocks. This makes them an attractive investment for income seekers in today’s low-interestst rate environment.

However, as with all investments, P2P investing comes with the risk of default by the borrower.

Platforms have stringent parameters in place to assess risk and interest rates are set accordingly. Loans perceived to be higher risk will have a higher interest rate.

How do I invest?

Crowdfunding is facilitated by platforms where businesses create ‘pitches’ of thier ideas and investors conduct due dilligence.

Most companies raising finance by Crowdfunding will be more than happy to speak to individual investors and answer any questions they may have.

Each platform has their own processes in place to ensure investors are not being mislead and will help with the issuing of shares.

For a review of a selection of the UK’s leading Crowdfunding and Peer-to-Peer platforms, please visit our comparison.

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