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Business Knowledge

Crowdfunding and P2P lending: Which is right for my business?

Technology is fundamentally changing the way businesses access finance. If you’ve faced barriers with traditional lenders in the past, now is the time to look to alternatives.

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Alternative finance in the UK is growing

Alternative types of funding, most notably peer-to-peer lending (P2P lending) and crowdfunding, have grown significantly over the past 5 years during a period where banks were widely criticised for not lending enough to small businesses.

In 2015, £2.8 billion of finance was originated through these platforms in the UK alone1, helping cement online marketplaces as part of the financial mainstream.

Sourcing finance from the crowd

P2P lending and crowdfunding share one common principle: raising finance online from a number of people, or investors, who pool together.

The crucial difference between crowdfunding and P2P lending, or marketplace lending as it is increasingly known, is how to repay your investors.

“I thought about crowdfunding for my business, but peer-to-peer lending offered a more predictable monthly repayment. And, having built my business from scratch, I was reluctant to give away any equity.”

Mike Jessop from Moo Free Chocolates, a dairy-free chocolate manufacturer in Reading. He expanded the business using a peer-to-peer loan from Funding Circle and now has a new factory in Devon, exporting worldwide.

What is crowdfunding?

Crowdfunding is a method of raising finance which is typically suited to startups or early stage businesses, as you’re not required to make regular repayments like you would with a bank loan. Instead, you can give away equity in your business or donate the final product.

The majority of crowdfunding platforms in the UK involve selling ownership in your business, known as equity-based crowdfunding. Some global crowdfunding websites operate a rewards-based scheme, where in exchange for a contribution, you give your investors the finished product you’re making.

What is P2P lending?

P2P business lending is a fast and accessible way of getting a cash injection into your business. The essential difference between P2P lending and crowdfunding is that you do not give away any equity, but rather pay interest on the money you borrow — much like you would with a bank loan. P2P loans are thought to be better suited to established businesses who can service their monthly loan repayments.

Whether you need a loan to buy a piece of equipment, purchase a property, buy stock or general working capital, P2P lending for businesses offers the most accessible and flexible way of finance for established businesses.

Almost all P2P business lenders in the UK operate as debt lenders, like Funding Circle.