The Complete Guide to Crowdfunding and P2P Lending
For most businesses, banks fall short in providing necessary capital. In 2022, more businesses borrowed from suppliers ($2.15 Trillion) than from banks ($1.5 Trillion). Venture capitalists funded less than 2/10's of a percent of U.S. companies. This capital shortage has led small businesses to explore creative financing methods, with crowdfunding emerging as an extraordinarily popular option. Also known as crowd financing or equity crowdfunding, this phenomenon involves individuals pooling funds through the Internet to support others' efforts.
Types of Crowdfunding
Charity Crowdfunding
Utilizes platforms to connect donors with causes. Supports disaster relief, startups, political work, and nonprofits. Effectiveness depends on media presentation.
Rewards-based Crowdfunding
Seeks contributions in exchange for future goods or services. Offers incentives like T-shirts, product copies, acknowledgments, or voting rights on project decisions.
Peer-to-Peer Lending
Connects borrowers directly with individual lenders. Involves repayment of principal and interest, similar to traditional loans.
Rewards-based Crowdfunding Platforms
1
Kickstarter and Indiegogo
Two major rewards-based crowdfunding sites. Money collected from "investors" is not repaid if the goal is met or exceeded.
2
Goal-based Funding
If the project's donation goal is not met, all funds are returned to donors.
3
Suitable for Various Projects
Good for businesses and people in the arts, small businesses testing products, and charity groups.
4
Success Stories
Examples like Pebble, a watchmaking company that raised millions and found their target market simultaneously.
Peer-to-Peer Lending Overview
1
Borrower's Story
Borrowers describe their need for money, spending plans, repayment strategy, and other compelling details to attract lenders.
2
Credit Check and Interest Rate
The P2P site pulls and displays the borrower's credit history and sets an interest rate.
3
Lender Bidding
Lenders review loan requests and bid on those they find attractive.
4
Loan Management
The P2P site monitors the loan, collects monthly payments, and distributes funds to lenders.
Major P2P Lending Platforms
Other P2P and Specialized Lending Platforms
Business Loans
Platforms like SoMoLend, OnDeck, and Kabbage offer loans ranging from $100 to $250,000 with quick approval processes.
Student Loans
Specialized platforms like Vittana and PeopleCapital focus on matching students with lenders for educational funding.
Family and Friend Loans
Services like LendingKarma and Wikiloan provide tools to formalize loans between friends and family members.
The JOBS Act and Equity Crowdfunding
1
JOBS Act Signed
Signed by President Obama in April 2012, allowing small businesses to raise money by selling stock directly to investors through crowdfunding platforms without SEC registration.
2
Investor Protections
Limits set on contributions to protect non-accredited investors: 2% of annual earnings or 10% of net worth, up to $40,000 per investor.
3
SEC Implementation
Despite initial resistance, full implementation expected by September or October 2013, with regular updates available on the SEC website.
4
Market Growth Projections
Estimates suggest crowdfunding could become a $4 billion market, with potential for rapid growth to 10 times that size.
The Future of Crowdfunding
Rapid Growth
Crowdfunding is expected to experience swift growth, with projections ranging from $4 billion to $40 billion in market size.
Regulatory Developments
FINRA has established registration processes and is creating rules for crowdfunding site operations, encouraging industry self-policing.
Expanding Opportunities
The JOBS Act opens up new possibilities for small businesses to raise capital through equity crowdfunding, potentially revolutionizing startup financing.
Stay Informed
To keep up with the rapidly evolving crowdfunding landscape, follow news on sites like crowdfundinsider.com, thenewentrepreneur.com, and P2Plendingnews.com.
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