Peer to Peer FinancingIs Peer to Peer & Crowdfunding all smoke & mirrors?
With all the noise and chatter about the lack of business funding we looked at alternative sources for SME’s who are needing that extra piece of equipment or money to explore new markets etc.
Apart from discovering that there are at least “30 Ways” a business owner can currently access finance we looked very closely at Peer to Peer & Crowdfunding.
Mainstream banks are continuing to struggle to meet the investment needs of UK small businesses and many peer-to-peer and Crowdfunding sites have emerged as a result. To date we discovered 2033 worldwide with 100 of these based in the UK.
In the UK listing there are 45 of these websites that specialise in finance.
We agree with this statement by the Business Secretary Vince Cable in that, “as businesses are continuing to struggle to get credit from their banks, developing alternative lending channels is essential so firms are less reliant on banks”.
We say “Why go to your bank when you know the answer is NO!
So how did this (Peer to Peer) P2P sites get started? They appeared in the mid-2000’s as a way for savers to earn higher interest rates by lending to other people, instead of putting their money in a bank account.
Margins are slimmer than with a high street bank, but P2P sites are now thought to provide between just under £200 million a year.
There is a difference!
P2P finance is generally for more established SME’s whereas Crowdfunding is seen by many as a better option for start-ups and less established businesses.
Crowdfunding is different from P2P lending as it is a way to raise finance by tapping into a ‘crowd’ of like-minded people willing to invest smaller amounts of cash in exchange for rewards and a stake in a business.
Although very similar to Crowdfunding, the main difference then between Crowdfunding and P2P lending is that the latter is for loans, not contributions.
So how does it work?
Prospective investors can search through the listings on these websites. These opportunities are ranked by risk and given a small profile which is then advertised on the said crowd funder’s website for investors to determine whether they’d like to bid to be a part of a deal.
In many instances, investors bid with the lowest interest rate they would be prepared to go down to in the bidding process.
Crowdfunding is closely related to P2P lending. Both financial models enable capital to be raised through online campaigns. Crowdfunding is about a crowd of people pooling money together, while P2P lending doesn’t necessarily require a crowd of small funders, but could for instance be from one individual.
P2P lending is a form of private lending and occurs when individuals loan money to others without going through a bank or traditional intermediary.
Lending in this way has been popularised by the internet because linking borrowers to lenders is much faster and one can reach a large audience instantly. Using the these internet sites,
borrowers can get better terms and access to more capital than before, and lenders can have access to a larger
number of lending situations and earn higher returns.
With Crowdfunding, businesses can access capital that they don’t have to pay back, but rather provide rewards for those who give money as a donation to the project. One’s chances of raising capital through Crowdfunding are much higher than with P2P lending.
Are there any drawbacks?
There has been criticism of the models with some consumer groups believing that consumer protection standards are simply not good enough, and some say that those lending money on some sites will not be protected by the Financial Services Compensation Scheme.
Do I need a broker or IFA?
Like all things in life if you decide to go it alone, take a chance or ignore advice you will need to settle with the outcome or circumstances you find yourself in. From our experience one only has to refer to the Interest Rate Swap loan deals done by the UK banks and the results of SME’s frequently not getting any advice or guidance when they agreed to these forms of loans.
Don’t just turn up on the website! If anyone thinks this is an easy cheap way of accessing finance then think again.
If you’re business proposal is poorly written and little research or collating of data for any prospective investors due diligence is garbled then as the saying goes “Rubbish in Rubbish out”. Your eventual deal could be for less money, poor terms and may not suit the industry you are involved in.
We are registered with many of these websites and offer our services and guidance to clients who recognise that raising capital in this way could be what the business needs.