The internet has been a blessing for people which has eased many requirements of the individuals over time. There are plenty of apps that help people in commuting, purchasing food, ordering electronic appliances and also in providing entertainment. Similarly, there are also P2P lending and crowdfunding platforms which offer funds for creative works and start-ups. This opens new opportunities for people who have been facing problems with getting an investment for their projects.
What is peer-to-peer lending?
Crowdfunding helps individuals to pitch their ideas to an audience and raise funds for their projects. The people who fund the projects receive the favour back by rewards, sample products, equity shares, and other means.
Peer-to-peer funding involves interactions between individuals without a central authority. It is done in several ways, such as providing special benefits for the users of an application when they share the app with their peers. This benefits the developers as they reach out to a wider audience and also helps the users to receive special discounts and services for sharing the application. It saves companies from referring to platforms or organisations for advertising their products or services.
Together P2P and crowdfunding can raise fundings for business on online platforms in exchange for interest payments or equity shares. The online platforms act like traditional banks which offer the funds as an alternative.
Why is peer-to-peer lending beneficial?
P2P can allow businesses to raise more money in less time. A business can earn millions of dollars while using the P2P service. This type of funding makes the financial requirements easily accessible to small businesses who do not meet the eligibility criteria of banks. Crowdfunding also offers individualised financing terms according to the needs of the borrowers. The repayments for the interests rates are also flexible for the borrowers according to the plan that they choose. The reason why individuals like to invest in crowdfunding is that they also enjoy several rewards to even an extent to share equity with the companies. It allows individuals to invest in companies with potentials which can offer them profits in future.
Why can crowdfunding be a bad idea?
While crowdfunding seems like an advantageous plan as compared to traditional financing, there are some drawbacks in this plan too. The banks which offer financial support tend to have better performance track records and lower default rates. If someone is not confident about taking loans from an individual investor, banks are the best option for them. The banks also charge significantly lower interest rates as compared to the overall expenditure on the crowdfunding platforms.
Another drawback in crowdfunding is that the business will need to disclose a lot of financial information to provide the likelihood of repayment. It makes the information of a company public. If the borrower is not okay with disclosing such financial information to individual investors, they should refer to a bank for investment.