In the past ten years, crowdfunding, a relatively new idea, has become extremely popular. It alludes to the process of obtaining a huge number of little donations for a project or endeavor. Based on the underlying mechanism, crowdfunding can be divided into many forms, including reward-based, donation-based, equity-based, and lending-based crowdfunding. Lending-based crowdfunding, its characteristics, and how it differs from other forms of crowdfunding will all be discussed in this article.
Crowdfunding that is based on lending, commonly referred to as debt crowdfunding, allows people or businesses to raise money by borrowing money from many different people who each make a tiny contribution. In most cases, the lender receives a return on their investment after the borrower pays interest on the loan. A crowdfunding website that serves as a middleman between the borrower and the lenders streamlines the financing procedure.
Contrarily, equity-based crowdfunding entails raising money by offering a sizable number of investors a stake in a company. In this model, the investors take on the role of shareholders and are granted a portion of the company’s profits. Equity-based crowdfunding is better suited for new companies and small firms that need a lot of money to grow.
Although regular bank financing and crowdfunding are frequently contrasted, there are several key differences between the two. A borrower seeking for a loan from a financial institution, which assesses the borrower’s creditworthiness and ability to repay the loan, is known as traditional bank lending. In contrast, crowdfunding sites do not evaluate the borrower’s creditworthiness; instead, the lenders themselves are responsible for assuming the risk of default.
Another phrase that is frequently used interchangeably with crowdfunding is peer-to-peer lending (P2P). P2P lending, on the other hand, is a particular form of lending-based crowdfunding where borrowers and lenders are connected directly without the help of a crowdfunding platform. P2P lending platforms ease the loan process by connecting lenders and borrowers, but they do not assume any credit risk.
In conclusion, lending-based crowdfunding is a well-liked substitute for conventional bank lending that enables people and companies to raise money by borrowing from a lot of different people. Although it has some parallels to P2P lending and equity-based crowdfunding, lending-based crowdfunding has certain distinctive characteristics of its own, such as the repayment of loans with interest. An effective technique for democratizing finance and giving access to capital to those who might not otherwise have it is crowdfunding as a whole.