Crowdfunding vs. P2P & Traditional Lending

Finding the right funding for your business can be a difficult task, and you might feel some confusion when trying to differentiate between all of the available options. We’ll help you get a better understanding of how newer financing options, such as Crowdfunding and P2P (or Peer to Peer) Lending compare to each other and to traditional lending.

Crowdfunding is exactly what it sounds like: You receive money from a group of people that more often than not expect something in return for their contribution. Unlike crowdfunding, where many people make contributions, P2P lending is based on an individual investor providing the money. Lastly, traditional lending is financing from a bank that is repaid in increments, which most are familiar with. Find out more about each option’s respective advantages and disadvantages and which type of financing is the right one for your business.

What is Crowdfunding?

If you have heard of Indiegogo or Kickstarter, then you probably already know what crowdfunding is. Like the name suggests, crowdfunding is a way of raising money from a group of people who get something in return for their investment. The most common types of crowdfunding are reward crowdfunding and equity crowdfunding. Reward crowdfunding is based on compensating backers with either products or merchandise in return for their contribution. Equity crowdfunding however, allows backers to get shares of your business in return for their investment.

Crowdfunding Advantages

Convenient and fast: It is fairly easy to set up a crowdfunding campaign on popular websites like Kickstarter or GoFundMe and there are no special requirements to get started. Within a few hours your campaign can be up and running and receiving its first contributions, which makes this an easy and convenient alternative to other funding options.

Stay in Control: You decide what your crowdfunding campaign entails and how backers are compensated. You may choose between an equity or reward campaign, among other options, and you’re not obligated to give up a percentage of your equity if you do not wish to do so.

Attracting Early Customers: Getting your campaign seen on the platform with thousands of viewers and therefore drawing attention to your product can give your brand the momentum it needs to attract an early and loyal customer base and grow from there.

Feedback: Presenting your product ideas to a larger audience can provide you with valuable insights and feedback on what people are responding to, what is working, and what is not. This kind of valuable feedback is rare to get a hold of in a business’ early stages.

Crowdfunding Disadvantages

Platform Fees: Most crowdfunding platforms charge a small percentage on the money raised in exchange for being able to use their platform. Although these fees aren’t very high, they still lower the amount of money you’ll receive at the end of your campaign.

Failure Risks: If your crowdfunding campaign fails, it usually means that your business plan was not well thought-out and most investors won’t want to be associated with your product. Many platforms also only offer you one chance per product, which means you can not list the same product again after the campaign is over.

Funds Not Guaranteed: When you use fundraising platforms, you are required to set a monetary goal that needs to be achieved before your campaign can reach the “funded” stage, which will allow you to draw the money at the end. If your campaign does not accumulate enough funds towards the campaign goal, you walk away with no funds at all, not even the contributions that were already made during the campaign.

Risk of Imitation: You have a ground-breaking idea for a product and present a prototype during your campaign to raise the funds you need. Not filing for a copyright or patent before making your product public opens the door to copycats that might steal your idea and possibly leave you empty-handed by the end of your campaign.

What is Peer to Peer Lending?

Peer to Peer Lending is an alternative to borrowing money from a bank for your business and involves receiving funds from investors. Borrowers and investors are often matched via peer to peer lending websites, making this type of lending one of the newer funding options for brands. Here are some of the advantages and disadvantages of P2P loans:

P2P Lending Advantages

Availability: P2P websites will match you with the best options available, which offers emerging brands better access to a loan if they cannot go the traditional route with a bank.

Fast and Easy: Getting a P2P loan can be fast and easy since it takes place entirely online. You can compare offers, look at loan conditions at a glance and apply within a few clicks, making this a very convenient option.

Credit Friendly: Even with a less-than-ideal credit score you can find an investor that will give you the funds you need, even if that means smaller amounts at first.

Removing Limitations: Businesses often seek out alternative financing options because banks deem them as too risky. P2P loans are fairly new, and offer brands a novel way to get capital that will help them grow if they don’t qualify for a bank loan or other non-bank lending options.

P2P Lending Disadvantages

Large Fees: There may be high fees charged besides interest that you pay for receiving the money, making this a costly option.

No Insurance / Government Protection: P2P platforms are fairly new and there are little regulations and protections for borrowers, making this a risky alternative when in need of a loan.

Personal Information Required: Although you can get approved without picture-perfect credit, this type of lending requires you to submit plenty of personal information to make sure you qualify for a P2P loan.

No Business Assistance: Other non-bank lenders can provide you with the funds your brand needs in addition to business assistance and insights on trends in your industry. The only thing you receive with a P2P loan is money, missing out on additional benefits other lenders offer to help grow your business.

What is Traditional Lending?

Traditional lenders, such as banks and credit institutions are safe and reliable, in addition to offering competitive rates. Bank loans are often secured loans, meaning they require collateral to lend against. Here are some advantages and disadvantages of traditional lending:

Traditional Lending Advantages

Competitive Rates: Banks (and also non-bank lenders) can offer more competitive rates than individual P2P investors and are a great option for businesses that qualify for a traditional loan.

Retain Equity: Secured loans are backed by collateral rather than equity, which means you do not have to give up a percentage of your business. You get to keep full control of your brand, while having access to the funds you need to grow.

Flexibility: These types of loans come with the freedom to use the money however you see fit. While other lending options have set requirements for what the funds can be used, bank loans do not interfere with your spending plans.

Government-backed: Small business loans like the SBA(7)(a) is a loan specifically designed for small businesses, and is guaranteed by the Small Business Administration (SBA). These loans come with highly competitive interest rates, aimed to help small businesses get the funds they need while bolstering the economy.

Traditional Lending Disadvantages

Lengthy Process: The process of procuring a loan from a bank can be lengthy and time consuming and often involves submitting a business plan and financial projections for your brand, which can determine if you receive the funds or not.

Strict Credit Requirements: Banks often require above average personal and business credit in order to do business with smaller brands. You have to meet a set of requirements in order to qualify, which can make it difficult to get funded.

D2C Disadvantage: Banks often consider the direct-to-consumer business model as too risky and are often hesitant to work with emerging brands, which makes experienced non-bank lenders a great alternative for emerging brands.

No Business Assistance: Banks often cannot get involved in helping emerging businesses make informed decisions in their industry. Experienced non-bank lenders like Assembled Brands can provide you with the necessary funds in addition to industry verticals, cross-marketing opportunities and general business assistance.

What Type of Financing is Right for Your Business?

When considering a loan for your business, there are many factors specific to your situation that should be considered before procuring one. The size and growth stage of your business, as well as your business credit and collateral are all important factors as to which funding option to choose. Peer to Peer, traditional lending and crowdfunding do not include valuable business assistance that lenders like Assembled Brands can provide to accelerate growth and make informed business decisions.

If you have either inventory or accounts receivable to lend against as collateral, we might have the right funding solution for you. Assembled Brands offers capital solutions that scale with the growth of emerging consumer goods brands, tailored to the needs of your business. Your brand may benefit from inventory financing or a working capital loan.