P2P Business lending: Not for Individuals Only
When it comes to crowd-based funding, online venues that cater to individuals have attracted most of the attention. This is not surprising given that the alternative finance models that have accounted for the largest share of activity in recent years are peer-to-peer (P2P) consumer lending platforms such as the one offered by Bondora.
But what many people might not realize is that alternative business funding volumes have also been growing rapidly. In Europe, for example this segment has recently seen upper-double and triple-digit percentage increases. According to the Cambridge Centre for Alternative Finance at the Cambridge Judge Business School, P2P business lending and equity-based crowdfunding rank second and third, respectively, after P2P consumer lending.
In fact, the Centre noted in a report, Sustaining Momentum, published in collaboration with accounting firm KPMG and the CME Group Foundation, European alternative business lending platforms have in recent years become "an important source of finance for entrepreneurs, start-ups and small and medium-sized enterprises (SMEs)."
Clear benefits for businesses
Initially, these collaborative approaches sprung up to meet the needs of individuals who had long been shortchanged by banks and other intermediaries, notably in countries where they had a stranglehold on domestic financial activity. However, the benefits they could offer to all sorts of businesses were not hard to miss. Today’s online platforms not only help to increase the resources available for those who ae seeking financing, they also facilitate terms that are more economical and accommodating than what the bricks-and-mortar establishment has to offer.
Suddenly, firms with good long-term prospects no longer have to struggle to be taken seriously by investment bankers, venture capitalists and the proverbial rich uncles who are only looking for home runs and who expect a lot for their support and services. Instead, businesses can direct their pitch to a receptive audience and frame it in ways that cater to different needs and interests. If they choose, they can go with the option that most closely resembles the traditional capital-raising approach: equity-based crowdfunding.
However, there are big differences between the old way of oiling the wheels of commerce and the new alternative finance model. With equity-based crowdfunding, there are no middlemen taking a big cut that comes out of both sides' pockets. There is also greater transparency and efficiency, which creates a more collaborative and constructive atmosphere. Under the circumstances, it is easier for those involved to strike deals that make sense and are fair, and that everyone is happy with.
Equity and reward-based crowdfunding: more than "finance 2.0"
But not every platform is simply a newer and better version of what existed previously. In some cases, other factors, including differences in generational mindsets, have spurred completely novel approaches. If somebody has an idea, for instance, for an interesting new product that is just what people are looking for, those with the urge to transform that vision into reality can seek to tap the financing available through a reward-based crowdfunding platform.
Using this approach, they can potentially build a business – based initially, perhaps, on little more than a concept – and join the ranks of others who have turned their entrepreneurial dreams into thriving enterprises. By collaborating in this way, they can also garner the kind of valuable customer and market feedback, product insights, operational know-how, and marketing visibility that many SMEs have a hard time getting without spending a lot of time and money in the process.
The range of activities that are now being financed at online marketplaces has also expanded significantly. Investors and lenders are not just engaging in transactions aimed at creating businesses and bringing new products to market. They are also providing a way to fund an asset class that is, globally speaking, valued at almost three times the output of the world economy, according to Savills, a United Kingdom-based real estate advisor.
Expanding the range of possibilities
Like the business-focused platforms, P2P business lending and equity-based property crowdfunding enable those seeking attractive risk-adjusted returns and portfolio diversification to choose a strategy that suits them best. As with other variations of the two approaches, the equity-oriented model generally appeals to those who are comfortable with taking on more risk in exchange for higher potential gains. Those who are somewhat risk averse and have more moderate expectations about upside prospects, or who are mainly interested in income, tend to favor the alternative.
Regardless, despite the notable success of equity-based crowdfunding, reward-based crowdfunding and P2P business lending, it is worth keeping in mind why some might nonetheless prefer the original consumer-lending concept. Among other things, the fact that it centers on financing a large number of small, short-term loans to borrowers whose credit histories, economic circumstances and other relevant details are not overly hard to evaluate makes it a logical choice for some types of investors.
Other issues to consider
When evaluating businesses that are seeking financing, there are generally more factors that need to be taken into account. A well-run company can still suffer financially from shifting tastes and preferences, cutthroat competition, or a change in the macroeconomic landscape. Even if they are genuinely intent on honoring their obligations, they could nonetheless find it difficult to stay in business. While any number of individuals might also be affected by an economic downturn, history suggests that most will do whatever is necessary to remain afloat.
Regardless, decisions about whether the consumer or business segments, or the crowdfunding or crowdlending strategies, represent the best course of action will depend on expected return calculations, risk tolerances, the time periods and amounts of money involved, and other factors. Undoubtedly, some investors might prefer income to capital gains, or view a cautious balance between risk and reward as more favorable than others who are involved in today’s online marketplaces.
Whatever the case, for those who are seeking opportunities that can be tailored to their specific needs and goals, rather than those that suit banks and other traditional financial services intermediaries best, today's alternative finance platforms look to be quite an appealing option.