When you’re looking to raise capital for a small business or startup company, there are a few routes that you can go, which each have their own pros and cons.
In this post, we’re going to examine how traditional crowdfunding (think Kickstarter and Indiegogo) compares with peer to peer lending platforms like Prosper and Lending Club.
Overview of Crowdfunding
You’ve likely heard about some of these campaigns in the news that have completely smashed their crowdfunding goal and gone on to raise hundreds of thousands of dollars.
Each campaign is centered around bringing some kind of creative or technological project to life. A typical crowdfunding campaign features:
- A pitch video that is 2-4 minutes long that explains what the product or project is, why it matters, rewards or perks that are being offered, and a brief overview of the team or individual behind the initiative.
- Campaign text that dives deeper into the project and explains how the funds will be used, when rewards will be fulfilled, and why this project matters.
- Rewards or perks that can be accessed by individuals who back the project.
- A comments section where backers can provide feedback, ask questions, and interact with other backers.
- Updates that function as the project’s blog and story.
In exchange for providing all of this functionality and a marketplace where backers can discover your project, the crowdfunding platform that you go with takes about a 5% fee + payment processing.
Some platforms offer only “all or nothing” crowdfunding, where you must hit your goal in order to receive any funds that have been pledged, and others have a “keep what you” raise model, and traditionally charge higher fees.
Benefits of Crowdfunding
There are a few different pros to running a crowdfunding campaign, which I’ve listed out below.
- You gain access to a marketplace of supporters and regular backers.
- You don’t have to worry about the technical aspects of a campaign, like payment processing or making sure that the video works properly.
- Almost every platform has in-depth analytics, which will give you an idea of which reward tiers are most popular and where people are finding your project online.
- There is a definitive window of opportunity when individuals can back your project, which weeds out indecisiveness.
- You don’t have to give up equity in your business.
Drawbacks of Crowdfunding
As much as I love crowdfunding, there are also negative components to this financing method. Consider the following:
- You will need to fulfill any rewards you promised. This means that you can’t just keep the cash that you’ve raised and use it as you’d like. You’re going to be using most of it to product the end product and ship those products out to your backers. You might see a 5-10% profit margin.
- It’s a public endeavor. If you fail, you’re going to fail publicly. Although Kickstarter does ask google to de-index failed campaigns, it can still be embarrassing to some people to have a failure on their record.
- You need to bring your own crowd. There are a few reasons why. First of all, in order to rank well in a crowdfunding platform’s algorithm and show up on their websites homepage or at the top of your category, you need some initial momentum. Secondly, most crowdfunding campaigns don’t receive pledges from strangers. Many receive the majority of their funds from the individual’s own social network and marketing efforts.
- A marketing and PR plan is a must, which takes time to develop. At some point, you’re going to exhaust your own social network and tap out any clout that you have online. You’re then going to need to bring your story to existing online communities, bloggers, and journalists.
Overview of Peer to Peer Lending
P2P lending is a newer financial tool that allows a bunch of investors to fund a loan through an online marketplace that matches up the borrowers and lenders.
Individuals decide whether or not to fund your loan for a fixed rate of return, rather than a bank manager.
As a borrower, you will be expected to provide the following information:
- Your credit score.
- What you’ll be using the loan for.
- The amount that you’ll need.
- Your annual income range.
- Your personal information (DOB etc).
The great thing is that you can check the interest rate you’ll receive for free without impacting your credit score on a lending platform like Prosper.
Benefits of P2P Lending
Peer to peer lending is an increasingly popular way to obtain a personal loan for your business. Here are a few benefits of trying out this new financial tool:
- Fixed repayment rate.
- Easy online application.
- Unsecured loan (no collateral).
- The capital is deposited right into your bank account
- Payments are made automatically.
- Fast funding rate (don’t have to wait long for the loan).
Drawbacks of P2P Lending
Remember, in order to receive something, whether that’s capital or connections, you must pay some kind of cost. In this case it takes the form of:
- Fixed startup costs.
- The certainty of repayment, whether your business works out or not.
- You’re putting your credit rating on the line.
- Stress. Though this is also true of crowdfunding.
Personally, I don’t like the idea of taking on debt when starting a new company, and would prefer any alternative, even if that’s working extra hours. But, not every company or individual is the same and some are more comfortable with debt than others.
So which should you go with?
Ultimately, it’s up to you! What’s your tolerance for risk? How badly do you need startup cash? Are you willing to deal with the headache of fulfillment?
