Crowdfunding vs. Peer-to-Peer Lending: Which Funding Option Will Work Better for You?

In the past 10 years or so, crowdfunding and peer-to-peer (P2P) lending have become trendy ways to fund your small business.

But while both crowdfunding and peer-to-peer lending involve other people giving you money, they have some big differences―like the way you get that money and your responsibilities after taking it. So crowdfunding might work better for your business than P2P lending, or vice versa.

Either way, we can help you figure it out. We’ll explain what crowdfunding and P2P lending have in common, what makes them different, and how to decide which is right for you.

Peer-to-peer lending is a specific type of business financing in which individual investors―not traditional banks or credit unions―provide funding to small businesses.

P2P lending usually takes the form of business loans or lines of credit. And while individual investors are the ones ponying up the money, they typically do so through a lending platform (like Funding Circle or StreetShares). Often these platforms pool together money from different P2P investors to extend business loans.

Thanks to P2P lending platforms, the borrower and the investor never actually interact in most cases. The lending platform acts as a middleman. So the borrower applies, gets funded, and repays the loan through the platform.

Small-business owners often prefer P2P lending over traditional loans because P2P lenders generally have lower borrower requirements (such as credit score and revenue requirements). At the same time, P2P lenders also often have lower interest rates than many alternative lenders.

In other words, P2P lending sites are kind of like a happy medium between banks and short-term online lenders (though specific rates and requirements will depend on the P2P lender you go with).

Now that we’re all on the same page, let’s talk about how crowdfunding and P2P lending actually stack up.

Both crowdfunding and P2P lending give your business money from individuals. The primary difference is that P2P lending gives you a business loan that you have to pay back, while crowdfunding gives you funds that you never have to repay.

But there’s more to it than that. So we’re going to address three points of comparison:

• Who’s giving you money?
• How do you get them to give you money?
• What do you have to give them in exchange for the money?

Let’s start with the first question.

With rewards crowdfunding, anyone can give you money. Sites like Kickstarter let people donate as little as $1 to your campaign, making it easy for all sorts of people to donate. Plus, many rewards-based crowdfunding platforms publicly list active campaigns, so anyone can find your campaign and give money.

If you’re doing equity crowdfunding, the rules for giving money become much stricter (as do the minimum donation amounts). For example, only accredited investors can give money on CircleUp. Since you have to be worth at least $1 million and make at least $200,000 a year to be an accredited investor, that means that a lot fewer people qualify.

So what about P2P lending? Well, it depends on which lender you’re going with.

Funding Circle, for example, only accepts accredited investors on its P2P lending platform. In fact, you’ve got to commit to investing $250,000 to even get started. So some P2P lending platforms really limit who can fund businesses.

That’s not true of all P2P lenders, though. Take StreetShares. It lets would-be investors fund businesses by simply buying bonds. Anyone can buy these bonds, and the amounts start at just $25. Now, if you want to invest a lot (over $500,000), then you’ll need to be an accredited investor. But otherwise, anyone can invest.

When it comes to getting money, crowdfunding is all about your campaign. No matter what crowdfunding platform you end up using, you’ll end up creating some type of campaign page or site. It will probably include the following information:

• Who you are
• Why you want money
• What your plan is for the money
• Why backers should trust you
• What backers get in return

And all this information will probably be presented through a variety of media, including text, photos, and videos.

If you’re doing rewards crowdfunding, your campaign will probably focus more on the cool product you’re creating and the awesome rewards you’re offering. If you’re doing equity crowdfunding, you’ll probably include more data about projected performance and the state of the market.

Either way, though, crowdfunding requires a snazzy campaign that convinces people to back you.

Peer-to-peer lending, however, usually requires a formal application. Most peer-to-peer investors use one of the big P2P lending platforms (like Funding Circle). That means the platform itself creates and accepts your application. It will probably be the one that analyzes your application and decides whether or not you get approved.

Unlike crowdfunding campaigns, these applications don’t offer much room for your creativity or sales skills. Instead, they ask for basic information and documents:

• Personal credit score
• Business credit score
• Annual revenue
• Length of time in business

In other words, P2P lending is a much more data-driven process than crowdfunding. And if you don’t meet certain minimum requirements, you’ll probably get denied. Even if you do meet requirements, you might get a lower amount than you asked for.

One other thing to note: P2P lending usually has a much faster turnaround than crowdfunding. An online P2P lender can have money in your bank account within a week of your application, while a crowdfunding campaign often takes a month or more.

In crowdfunding, what you owe your backers will depend on whether you choose rewards or equity-based crowdfunding.

With rewards crowdfunding, you will, of course, have to give backers the rewards you promised. Platforms like Kickstarter make it easy to give backers updates while they’re waiting for these rewards, since the delivery process can sometimes take quite a while (like, say, you’re manufacturing a board game or shooting a movie).

Then there’s equity crowdfunding. As we said above, your backers will get a certain amount of equity in your company, meaning they get partial ownership. The details will, of course, depend on the exact arrangement you come to. But this often means they get a portion of company profits, some decision-making power in the company, and company stock shares.

Note that neither rewards crowdfunding or equity crowdfunding requires you to pay back the money you get. It’s yours to keep. (Yay!)
Peer-to-peer lending, however, operates just like traditional financing. That means if you get a P2P loan, you’ll have to pay back the loan in full―plus interest and fees.

Your P2P lender will put you on a repayment schedule to ensure your loan gets paid back within the loan term (which can be anywhere from a few months to many years, depending on the lender). In many cases, they’ll also require you to make automatic payments from your business checking account.

So with all that said, which should you choose: crowdfunding or peer-to-peer lending?

Crowdfunding has many advantages, like money you don’t have to pay back, but it doesn’t work well for all business types. The businesses that tend to do best on crowdfunding sites offer interesting, unique products that people can buy.

That’s largely because many backers only offer up their money because they hope to get said product as a reward. People are far less likely to fund a service they’ll never get to use.

Plus, it’s usually easier to create a compelling campaign around a product than around a service. Products lend themselves nicely to photos, videos, and reward offerings.

Fortunately, a wide variety of products can do (and have done) well on crowdfunding―whether it’s a new diet drink, a short film, or a pinhole camera kit. Just remember that people are usually looking for something new and interesting. If your product looks like something they can already buy at a supermarket, you probably won’t find much crowdfunding success. (In that case, you might want to try P2P lending.)

Unlike crowdfunding, you can successfully get a peer-to-peer loan no matter what type of business you have. If you sell products, you can qualify.

But if you have a service-based business, you can qualify too.

That’s because P2P lending doesn’t rely on the flashiness of your business or your ability to create an interesting campaign―it just relies on your personal and business history.

That does mean, though, that P2P lending won’t work as well for brand-new businesses. Businesses with bad credit may also struggle to get a P2P loan. If you don’t meet a lender’s revenue or credit requirements, you really can’t convince them otherwise. Crowdfunding at least gives you a chance to persuade your audience. Even so, P2P is more accessible to many businesses than crowdfunding is.

So sure, it’s a bummer that you don’t get free funds. You do have to pay back your P2P loan, after all. But when the alternative is no funding or funding with very high interest rates, P2P lending starts to look pretty good.

Crowdfunding and P2P lending both provide excellent ways to get money for your small business. But while they both let you receive funding from individual investors, they work quite differently.

Thanks to its campaign-driven nature, crowdfunding works best for businesses that sell products. P2P lending, on the other hand, works well for service-based businesses and others―as long as they can meet minimum borrower requirements.

Whichever route you take, we hope you get the money you need.

Not sure either crowdfunding or P2P loans are the right financing option for you? Check out our guide to the best small-business funding options to find more ideas.

Disclaimer

At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.