CROWDFUNDING VS P2P LENDING: HERE ARE ALL THE DIFFERENCES YOU SHOULD KNOW!
You’ve made an early-stage investment and are searching for a financial backer to help you continue to grow it? You used to have to pound on the doors of every bank to receive a loan approval. You would have had an opportunity to engage other investors even if you hadn’t succeeded. However, this time-consuming process of gathering finances frequently came to a halt.
Alternative finance has been made possible by the sharing economy and innovative technology. Crowdfunding and peer-to-peer lending are the two forms. Despite the fact that they are diametrically opposed, they are frequently confused. This fact is sometimes the cause of their inappropriate use in the workplace. Today, we’ll clarify the air and see what the difference is between crowdfunding and peer-to-peer lending.
Due to the success of western enterprises in the market, the notion of real estate crowdfunding has begun to gain traction in India. In India, peer-to-peer crowdfunding is legal and controlled by the Reserve Bank of India. Because emerging technologies provide a wide range of connections, everyone in India may participate in real estate crowdfunding via their computers or mobile phones. As a result, several fintech businesses have sprung up to provide a sophisticated real estate crowdfunding platform that supports developers in obtaining funds for large real estate projects. The crowdfunding systems are built for simplicity of use, transaction transparency, and precise return monitoring.
SEBI is also interested in regulating the whole real estate crowdfunding market, which involves an equity-based return on investment. SEBI has taken positive efforts in this direction by releasing a consultation paper that examines the risks and advantages as well as the regulatory frameworks of other jurisdictions. In a few years, real estate crowdfunding in India is projected to be more organized and regulated, similar to other financial securities.
Types of Crowdfunding
There are three types of crowdfunding
This is the most popular form of crowdfunding as it allows investors to become the part-owner of the project. In equity-based crowdfunding, investors trade their capital to purchase the equity of the project. The equity owners receive a share of profits in form of dividends.
Here, people invest in an asset and expect rewards such as goods and services in return. Some examples of these types of investments include funding a civic project, free software, etc.
Here a large number of investors are approached to donate a small amount for the project without expectations. Mostly donations for social welfare causes, all the COVID relief campaigns that collect donations are one of the most relevant crowdfunding examples today.
What is peer-to-peer lending?
Peer to Peer lending is a direct lending method, where money is lent to the individual or business without the participation of an intermediary or middleman. As a fact, Crowdfunding allows its investors to own a stake, unlike P2P lending.
Here money is paid as a form of loan and returned with interest payable on the loan which is the only added income, and not as an investment that brings regular returns.
How does p2p lending work?
- Here’s how p2p lending works Filling an application – A potential borrower fills out an online application form on a p2p website showing their interest in borrowing.
- Assigning interest rates – From here the p2p platform takes over, they evaluate the project, understand its credit risks, etc, and then assign an interest rate to the project.
- Selecting investors – After the approval of the application, the platform curates ideal investors based on the business and then the list is forwarded to the borrower who can then go through the background and profile of each investor and choose.
- When the deal is made, the applicant (borrower) becomes responsible for paying back the interest in a periodic way and paying off the loan on the maturity of the contract.
Differences Between Crowdfunding And P2P
When comparing the two approaches, equity crowdfunding is riskier, but the incentives on offer may be argued to reflect this. As a result, equity crowdfunding platforms are primarily targeted at experienced investors, or those with a high degree of financial expertise as well as a thorough grasp of early-stage companies and the dangers they entail. Peer-to-peer lending has a higher degree of predictability, as well as reduced risks and rewards.
Obviously, this is just a high-level perspective; if you go further into individual platforms, you’ll discover hundreds of variations on the models given above, each with its own set of strengths and limitations.
Rewards And Risks
Peer-to-peer lending involves lesser risks as it provides more predictable returns in comparison to equity crowdfunding. But both the risk and rewards are lower.
Equity crowdfunding involves higher risks in comparison to P2p but the returns in crowdfunding are also higher than p2p lending.
Types and Nature
P2p lending is a specific type of investment. Their only aim is to provide funding to businesses and newer projects.
Crowdfunding offers a variety of investment options depending on what you want in return, such as reward-based crowdfunding, equity crowdfunding, and donation-based crowdfunding.
Peer-to-peer investment is usually for a finite period and the relationship ends when the loan is repaid.
A crowdfunding investment can be a long-term investment as the investor can keep their share as long as they desire and earn profit.
Since p2p lending is a form of a loan with a fixed interest and return rate the investor receives their money with the interest earned within a fixed time.
As crowdfunding is an equity investment, the returns earned are open-ended. As long as the business or project thrives, the investor will benefit in the form of passive income as they own a part of the business.
P2p is a commercial transaction and the two parties never have to meet.
Crowdfunding investors tend to be more involved in the project as they do not just own a share of it, but the returns they earn also depend on the success of the project.
Investor satisfaction also plays a very crucial role. Just like an angel investor, a crowdfunding investor usually prefers to run deep background checks before getting involved with a project
P2P Vs Crowdfunding: Risks involved
While equity crowdfunding is the most popular investment, both p2p and crowdfunding are exciting avenues. , These are not just good for asset generation, they also make diversifying your portfolio much easier. But like any other investments, these too, involve a lot of risks.
Liquidity is the ease with which you can sell off your asset in the future. An investor must prioritize high liquidity investments so that they can withdraw their money with ease.
A fraudulent company or business project could use loopholes or asymmetric information to steal from their investors.
If a company issues more shares in the future, it can affect the price of the previous share and any investor who does not purchase from the new shares might have to face equity dilution, which is the weightage of their share going down. There is always a possibility of dilution which cannot be overlooked.
Risk of failure
If you are investing in a start-up you need to know that a lot of start-ups fail. If you are looking to invest in a start-up then you need to look into the background of the project and analyse its chances of failure and success before investing.
P2p lending risks
Defaulting interest payments
Sometimes, the borrowers default their interest payments, this can lead to a lot of complications, hence it is advised that investors only invest through reliable platforms.
If you lend a high amount to one investor, it can be very risky.
Defaulting payment of the principal amount
Just like the interest payments, some borrowers might also default payment of the principal amount.
P2P Lending or Crowdfunding- How to choose your ideal option?
Understanding the differences between crowdfunding and peer-to-peer lending enables investors to select the platform and offer that best meets their needs. Is it fun for them to come up with new schemes? Or would you rather delegate asset allocation to someone else? Can they handle a range of returns? Is it more important to have a set rate of return?
It’s worth noting that the top platforms allow you to choose your own investment conditions. Assetmonk, for example, makes it simple to diversify crowdfunding investments by advising investors to distribute their money over a variety of properties. This is unique in a market where traditional landlords often own just one or two rental units.
Assetmonk also provides an option to depart via the internal Resale market, which functions similarly to a stock exchange. This is a ground-breaking approach in crowdfunding, as it eliminates the risk of investors becoming tied in for the long haul.
It is critical to emphasize that crowdfunding and peer-to-peer investment should only be done on regulated and permitted platforms.
Knowing the difference between these two helps an investor chalk out an investment strategy that suits them the best. For instance, do you want to be involved in the investment? Would you prefer taking higher or lower risks? While these questions are crucial, it is important to remember that you invest through a reliable platform. All forms of investments require discussing rules and regulations before moving forward with the investment.
Assetmonk is a real estate platform that provides high-end investment opportunities at lower risks and high-interest rates to its clients. They are known for their equity crowdfunding deals as they offer very high liquidity on their asset, perform elaborate in-depth research before bringing the project before the prospective investors.
Assetmonk also advises its investors on portfolio diversification by helping them invest in multiple high-end projects to promise profit. Unlike the traditional asset class that often leads to owning one or two rental properties, with modern investment platforms such as Assetmonk you can own shares of various high-end projects at the same time.
Also if you wish to exit the investment, Assetmonk lets you sell your assets internally in their internal resale market, so you don’t have to worry about your money getting blocked in a place for a long time as the process is highly liquid.
Crowdfunding Vs P2P Lending FAQ's:
Many experts count p2p as a furth form of crowdfunding investment. i.e. debt-based crowdfunding, because an investor loans some amount to the borrower. But overall these are two very different investment classes.
Crowdfunding involves many unrelated individuals coming together to invest in a project by pooling their assets, here they become the owner of a share of the project. Whereas in p2p lending, the investors only loan some money to the borrower, and in return, the investor receives interest on the loan made. Investors don’t own a share in p2p lending.
Peer-to-peer or P2p is a direct form of lending made to individuals or businesses, these are made without the participation of any official financial institutions.