Peer to Peer Lending vs Crowdfunding vs Crowdlending vs P2B

The terminology around various alternate investment terms can be confusing. For example, what is the difference between peer to peer lending vs crowdlending? How is this then different from crowdfunding?

Hopefully, I can clear up the differences in terminologies.

Peer to Peer Lending vs Crowdlending

Peer to Peer Lending and Crowdlending refer to the same thing. They are both terms that are used interchangeably, to refer to the crowd (aka people or ‘peers’) lending money to others. These ‘others’ may refer to a single person (another ‘peer’), or a business. Hence where the names P2P (peer to peer) and P2B (peer to business) come from.

Peer to Peer Lending

Peer-to-Peer Lending (Crowdlending) Definition

Peer to Peer lending (Crowdlending) allows individuals or businesses seeking to borrow money to be connected with investors seeking to lend out their money. This process removes the middle entity such as a bank or other financial institution, resulting in a better interest rate for both borrowers and investors.

How Peer to Peer Lending Works

There are many platforms that have been developed to connect borrowers with investors. These platforms can vary between two main types.

  1. A platform which will accept both Borrowers and Investors. These platforms have two sections on their site, one for directly obtaining a loan, and the other for investing in loans.
  2. A platform that only connects investors up with borrowers. These types of platforms have agreements with loan originators who seek funding for their loan books.

The interest rates offered to both borrowers and investors can vary greatly based on past credit scores, financial history, and the platform that is invested through. Types of loans also vary greatly and can include loans for mortgages, car, personal reasons, short term needs, pawnbroking, and invoice financing. Through most platforms, an investor is able to select specific loans from the borrower, taking into account their own risk tolerance.

Platforms earn a commission from fees that are charged to the borrowers. Investors generally do not have to pay fees (however, in some platforms fees do occur). Investments can start from as little as €1.

Example of Crowdlending Platforms

Within Europe, there are many Peer to Peer (P2P) lending and P2B (Peer to Business) Lending platforms on offer. These include the likes of:

  • MintosMintos is an intermediatory platform connecting investors with loan originators. The platform is a global marketplace, having more than 60 loan originators, and has loans available from over 30 countries. Mintos offers an average annual return of above 12.25% and has over 166,000 registered investors.
  • CrowdestorCrowdestor is a crowdlending investment platform, providing a connection between businesses requiring financing and investors. Crowdestor offers a buyback guarantee fund, and the platform will act as a co-developer or co/financer on all projects. Current returns are up to 21%.

Even though these platforms are European, they may not require the investor to be from Europe. They will require a European IBAN, but that can be obtained through money transfer applications such as Wise (formerly TransferWise) or Revolut (at no cost).

Outside of Europe, examples of platforms include:

  • LendingClub (USA)Lending Club allows both borrowers and investors to register through their platform. Borrowers can borrow up to $40,000, and investors can earn returns between 4–7% per year.
  • Prosper (USA)Prosper allows both borrowers and investors. Borrowers can borrow up to $40,000. Historical returns for investors on Prosper have an average of 5.3%.
  • RateSetter (Australia)RateSetter allows both borrowers and investors. Borrowers can borrow up to $45,000, and investors can earn up to 8%. RateSetter also offers loans in clean energy projects.

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Crowdfunding Definition

Crowdfunding is the process of raising small amounts of money from a big group of people (i.e. a crowd), generally through online platforms. It is used by individuals, businesses and charities to raise money for projects, ideas, causes or new ventures. This process of raising funds has been used to support artists, actors and even medical treatments.

How Crowdfunding Works

Crowdfunding collects small sums of money from multiple investors to finance a designated project, business idea, social cause or start-up venture. Usually, funds are transferred through a platform (i.e. Kickstarter).

Generally, the entity (individual or business) requiring funding, will pitch an idea through an online platform, which is then seen by tens of thousands of people. These people can then choose to invest money into that cause

Rewards for the investors can vary greatly and can include a part in the business, participation at launch parties, a product or gift, or nothing at all. The process avoids using traditional methods of financing, such as banks.

Crowdlending platforms usually charge a fee when collecting the money that people invest.

Types of Crowdfunding

There are a few different types of crowdfunding available:

  1. Investment/equity-based – An investor will receive a stake in the business from the borrower. This will include things such as shares
  2. Loan-based – Lending money to individuals in return for a set interest rate. This is also P2P Lending and crowdlending.
  3. Donation-based – An individual will make donations to the cause, charity or new venture. Nothing will be returned.
  4. Reward-based – The investor will provide money in return for a reward, such as the product the business is creating, or a signed photo.

Example of Crowdfunding Platforms

The example of a reward-based crowdfunding platform, that is most widely known, is Kickstarter. Since Kickstarter launched in 2009, over 17 million people have backed a project, with over 165,000 projects being successfully funded. Individuals that invest through projects on Kickstarter usually bet rewarded with the product that the borrower is trying to create. Another example is Indiegogo. Indiegogo is similar to Kickstarter, where investors can fund projects in their development stage, generally being rewarded with that product before it hits the market.

An example of a donation-based crowdfunding platform would be GoFundMe. GoFundMe is a crowdfunding platform that allows people to donate money for social causes or life events. Causes range from emergencies and medical bills to education, or newlyweds.

Examples of loan-based Crowdlending platforms can be found earlier in the article.

Crowdfunding vs Crowdlending

As mentioned above, these are two different terms, but they can sometimes be used interchangeably.

Crowdfunding is the broad overarching term which includes Crowdlending and Peer to Peer Investing, however, Crowdfunding also includes the crowd providing money in return for goods (i.e. Kickstarter), parts of a business (i.e. unlisted shares), and donations (i.e. GoFundMe).

Crowdlending (which is another term for Peer to Peer investing) is specifically about providing money to a person (for mortgages, personal loans, car loans etc) or business (for forestry, financing renovations for hotels, launching new product brands etc) in exchange for regular interest payments.

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