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Is Crowdfunding Better than Peer-to-Peer Lending?

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Both Crowdfunding and Peer-to-Peer Lending are great new ways to raise money for your business. Below I explain the differences, and some of the advantages and disadvantages of each. I end by determining which is better.

Peer-to-Peer Lending

Peer-to-Peer (or P2P) Lending is one person lending money to another person at a pre-defined interest rate. It's basically debt capital without the bank or traditional "middle man."

The benefit of P2P Lending is that 1) the interest rates are typically lower, and 2) the likelihood of getting the loan is greater than the likelihood of getting a traditional bank loan.

There are several popular websites that connect borrowers and lenders directly. The biggest two are:

  • Prosper.com
  • LendingClub.com


The downside of P2P lending is that you need to repay the loan and that there are limits to how much you can raise (generally only $25K at a time).
 
Crowdfunding

Crowdfunding is raising money from the "crowd" or general population. In Crowdfunding, you don't need to repay the amount raised. Rather, you give rewards (usually the product you want to develop) or equity to those who fund you.

The most established rewards-based Crowdfunding websites are:

  • Kickstarter is the largest Crowdfunding site. The downside of Kickstarter is that not every project is accepted and they charge a success fee of 8% in the event you get funding.

  • Rockethub is primarily for funding creative projects. Their network is not as large as Kickstarter's, but is still pretty big. They accept more projects, and also have a success fee of 8%.

  • GoFundMe is a large and growing Crowdfunding site. It is unique in that it doesn't charge a success fee if you get funded. GoFundMe does charge a $9 fixed monthly fee.

  • IndieGoGo is another very large Crowdfunding platform. It has more creative (e.g., film, music) projects than some of the other sites.


On the equity side, Crowdfunding if still extremely new and still only limited to accredited investors (expect this to change shortly). Crowdfunder is one of the leaders in the equity based Crowdfunding market now. We will see how it grows and other sites pop-up as non-accredited investors enter the market in 2014.

So, Which is Better?

I prefer Crowdfunding over Peer to Peer Lending because of the potential to raise more money through a larger group of people, and not having to pay the money back. I also like that all the people who crowdfund you 1) are potential future customers, and 2) can spread the word about your business.

However, the two funding sources are NOT mutually exclusive, so definitely consider using BOTH Crowdfunding and Peer to Peer Lending, since both are great forms of funding.

 

Suggested Resource: Do you want Crowdfunding? If so, don't try to raise it from scratch -- the 14-step blueprint already exists. Get the Crowdfunding blueprint here.


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