Crowdfunding and P2P Lending: Now Fund Your Business with Ease
Do you have a brilliant business plan in mind, but can’t turn it to reality due to shortage of funds?
Entrepreneurs, SMEs and many startups struggle with this challenge, as getting monetary backing to kick start their venture is ‘the’ biggest hurdle. Over the recent years, many financial institutions have tightened their lending criteria. They are also wary of associating with smaller businesses due to the underlying fear of increasing their Non-Performing Assets (NPA).
From this tenacious market emerged alternative financing options for startups. Crowdfunding and Peer 2 Peer lending (P2P lending) are two such approaches that have gained popularity over the last decade.
Moving away from the traditional lending methods involving financial institutions, Crowdfunding and P2P Lending, both are based on the principle of raising funds, ideas or obtaining services for businesses from a large group of people without using the bank as an intermediary. With the advent of the internet, these approaches have matured & evolved and become more sophisticated over time, reducing transaction costs and being easily accessible to smaller businesses.
Crowdfunding is a platform for venture capitalists. A pool of investors are registered in the platform and entrepreneurs pitch in with their ideas. If the investors find it profitable, they will fund for the venture.
Kickstarter, an American worldwide benefit corporation based in Brooklyn, NY, which has built a global crowdfunding platform, states that the success rate for getting investors is around 44%. The primary liability identified is achieving the capital required to fund the venture.
One of the ways this can be mitigated, is for the crowdfunding platforms to include portfolio management in their repertoire. This helps investors in analyzing their investment, and as a result, reduce their risks. The Crowdfunding community, in turn should be open to knowledge sharing amongst peers and with their collective ideas, be able to advise and educate entrepreneurs on delivering effective business plans.
P2P lending is for businesses that are short on funds and require loans to further their business. The borrowers will list their loan requirements on the platform and the investors will run a background check of the borrower. If the investor thinks it is safe to lend money, the lender shall place his/her bidding for the loan. Once the loan is approved and completely funded, the borrower can start utilizing the capital.
In the present P2P lending market, there is no liquidity or flexibility of resources. Investors gain their returns only when the entire loan amount is repaid by the borrower. So, the investor has to wait until the borrower completely pays out the loan. The major risk in unsecured loans is - if the borrower is unable to repay the lender, the investor would then lose out on both the principle amount and the interest.
What if there was a secondary P2P lending market where the investor who has won the bid of the loan can sell a part of his loan to other investors? What if these other investors are then willing to participate in funding this venture even further? These are the viable options, which could possibly bring in more flexibility and liquidity in the market and eventually reduce the risk for the investors.
With the mushrooming of startups, Crowdfunding and P2P Lending platforms are thriving in todays’ market. Crowdfunding’s total funding potential is estimated to grow up to $90 billion by 2020 (reported by Massolution) and P2P lending is expected to grow to 150 billion by 2020 (source: Morgan Stanley). These groundbreaking platforms are a boon to the entrepreneurs who are looking to change the world with their novel approaches and innovative ideas.