Crowdfunding vs Crowdlending: What’s the Difference
Crowd financing has become a prevalent method of securing funds, worldwide. And investors have been eager to profit from it. But there are different forms of crowdfinancing, and with terms like crowdfunding and crowdlending bandied about, it can get a bit confusing.
A clear understanding of these terms is crucial so you can make responsible investment choices. So, when comparing crowdfunding vs crowdlending, what’s the difference? Our short and simple crowdfunding crowdlending breakdown explains it all.
The Foundations of the Crowd Financing Method
Crowd financing has arisen out of the need to raise capital outside of traditional banks and loan institutions. Banks usually have very stringent policies when qualifying for business loans. An entrepreneur looking to secure financing for a new startup, would typically not meet their criteria.
The Intersection Between Crowdfunding & Crowdlending
When comparing crowdlending vs crowdfunding, it is immediately apparent that there are similarities. This is because crowdlending is indeed a type of crowdfunding. But whereas most types of crowdfunding are not loans, crowdlending is loans-based.
Overview of Crowdfunding
Crowdfunding is a fundraising method that relies on the collective pooling of funds, usually (but not exclusively) to finance a project or business. These funds are contributed by individuals, typically via an online crowdfunding platform.
The Importance of Choosing a Reputable Crowdfunding Platform
Most online crowdfunding platforms are regulated in some way, but this is not the case for all of them. Choose a crowdfunding platform wisely and do your research before contributing money. As an investor, you have the most to lose if things go awry.
Types of Crowdfunding
Although crowdfunding initiatives have similar objectives, there are different types of crowdfunding, and they can differ in how they operate.
Donation-Based Crowdfunding
In donation-based crowdfunding, the donation recipient investment does not repay the money or offer an incentive to invest in their project. This is not the norm for business crowdfunding, but rather for non-profit organisations or personal projects.
Rewards-Based Crowdfunding
In rewards-based crowdfunding, the recipient offers financial contributors rewards for investing their money. This is rare for startup crowdfunding but may apply to small business projects. Rewards may include free products, services, or subscriptions.
Royalty and Equity-Based Crowdfunding
In royalty-based crowdfunding, investors are offered a percentage of revenue accrued from the funded venture. Meanwhile, in equity-based crowdfunding, investors are offered equity in the company. This is similar to when venture capitalists invest in companies in return for an equity stake.
However, investing in startups through an equity-based crowdfunding platform allows you to do the same, without being involved in the complex decision-making world of venture capitalism yourself. You have a similar impact with a much smaller contribution, which is then pooled with other individuals’ contributions.
Debt Crowdfunding/Loans-Based Crowdfunding/Crowdlending
Debt crowdfunding, also known as crowdlending, is loans-based.
Capital raised this way is repaid to investors on a fixed schedule, with interest. It is a less risky investment than royalty or equity-based crowd financing. Although it may follow a similar structure to a bank loan, it operates independently of banking institutions.
The Pros & Cons of Crowdfunding
Crowdfunding has both pros and cons.
Pros
For people seeking to raise capital, crowdfunding offers a quick method for fundraising amongst a wider audience. It’s usually much easier to do this than qualify for a personal or business loan from the bank, especially for young entrepreneurs.
For investors, there are several pros too.
Cons
Unfortunately, it’s not all good news for investors, who bear the brunt of the cons of crowdfunding. These are:
Overview of Crowdlending
The crowdlending market is growing worldwide, rivalling traditional lending institutions.
As more and more investors discover the immense potential of marketplace lending, it continues to grow. That’s because, for investors, business crowdlending, or peer-to-peer (P2P) lending is a much more profitable form of crowdfunding.
P2P Lending
Peer-to-peer lending is the business crowdlending form of crowdfunding. As with other types of crowdfunding, people contribute small amounts and when pooled, these funds are used as capital for a startup business or entrepreneurial project. But these contributions are structured as loans.
In each case, the loan amount is repaid, with interest, to a fixed schedule and that means investors are assured of a reliable passive income. Even on platforms that charge a small fee, this can be a profitable investment choice.
In P2P lending, investors also choose which sectors to invest in. An example is real estate crowdlending, where the capital raised is specifically for financing real estate projects.
At first glance, business crowdlending is very similar to traditional lending. It revolves around loans that are repaid with interest. But there are distinct differences.
How Does Business Crowdlending Differ From Traditional Lending?
It is easier for the individual or business that needs to raise funds, to secure financing this way than with the traditional banking system. And it offers individual investors the opportunity to profit from it, rather than the big banks and loan societies.
Plus, the interest earned on that loan amount is often higher than the interest rate you would earn saving your money in a bank’s savings account. But you must choose a crowdlending platform you can trust.
The Importance of Choosing a Reputable Crowdlending Platform
Reputable crowdlending platforms offer investors peace of mind with regulatory compliance and borrower screening. This reduces the risk of losing your investment. It also ensures that you will continue to receive your loan repayments, with interest, at the times specified in the repayment schedule.
Use a regulated and verified crowdlending platform like Maclear, and you can rest assured that your investment is safe. You’ll have the convenience of a mobile app for managing your investment, the option of auto investments, and a secondary market.
There are other advantages to using a reputable platform. You can continue receiving your interest payments, even if the borrower’s repayments are delayed, thanks to safeguards like Maclear’s Provision fund.
You can also benefit from various bonus programs, including a referral program. That means even more profit in your pocket, on top of the gains of your initial investment.
Final Thoughts
In this crowdlending vs crowdfunding comparison, it is clear that while crowdfunding offers potential for profit, crowdlending is the most rewarding.
Crowdfunding can offer rewards and even business equity in return for investment. However, crowdlending, a type of crowdfunding, is structured as a loan and allows you to earn interest on your contributions.
Choose the right P2P crowdlending platform, like Maclear, and you have investment security plus several extra benefits that help you maximise your investment. Make the best investment choice, and register your account, today.