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Peer to Peer Lending vs. Crowdfunding

Peer to Peer Lending & Crowdfunding

What’s the difference between crowdfunding and peer-to-peer lending?

Both crowdfunding and peer-to-peer lending are alternative finance methods for organisations to raise capital. Whilst both are collective ways of raising funds, there are several differences in the way they operate and the potential risks involved.

Peer to Peer Lending

Peer-to-peer lending (also referred to as ‘P2P lending’ or ‘crowdlending’) is the practice of lending money to borrowers through an online ‘lending’ platform.

Who uses peer to peer lending platforms?

These platforms act as a financial matchmaking service, so to speak, which helps match lenders looking to invest with those who are looking to borrow. There are two types of lenders: corporate lenders and private lenders.

Peer-to-peer lending returns

Lenders often find higher rates of return than a traditional savings account, as there are higher risks involved. Peer-to-peer lenders often lend through an Innovative Finance ISA which also allows them to lend tax free.

Ablrate lenders can expect returns of 10-15%. You can view examples of funded loans on our completed loans page.

How do peer-to-peer lending platforms make money?

Peer-to-peer lending platforms make their money, primarily, by charging the borrower fees up front and in the ‘spread’. The spread is the difference between what a lender gets and what a borrower pays. This is a similar system to how banks make a profit when lending. Ablrate charges upfront fees and trailing fees, which we believe aligns us better with lenders.

What’s the difference between peer-to-peer lending and traditional banks?

The difference between a peer-to-peer lending platform and banks or traditional saving products are that there is, of course, a risk of the borrower defaulting on the loans made by lenders via the peer-to-peer lending platform.

Types of Loans

The Ablrate platform offers two types of portfolio loans: single company portfolio loans and diversified portfolio loans.

Crowdfunding

Popularised by social media, crowdfunding is a way of raising finance for businesses through a pool of lenders (often sourced from the internet). However, differing to traditional banking, this is done through lots of lenders offering smaller amounts of money.

Types of crowdfunding

There are several different types of crowdfunding:

  • Donation-based crowdfunding
  • Reward-based crowdfunding
  • Debt-based crowdfunding
  • Investment-based crowdfunding
  • Equity-based crowdfunding

How do crowdfunding platforms make money?

Crowdfunding platforms make their money by charging a percentage of the capital raised during the crowdfunding project.

Who uses crowdfunding?

Those who use crowdfunding to raise capital generally have one of the following three goals: to raise equity, to raise funds for philanthropic support (donation-based crowdfunding) for charities or individuals, or those aiming to raise capital for debt finance.

Crowdfunding is typically used by companies in the early stages of business, and equity crowdfunding is more targeted at sophisticated investors.

In most circumstances the project will only go ahead if the investment has been funded in full.

What are the risks of crowdfunding?

Equity crowdfunding is higher risk due to the fact that businesses could potentially fail or go bust, leaving lenders at risk. Furthermore, the return is not always guaranteed by the borrower, as the shares might not increase in value.

To find out more information about alternative finance and peer-to-peer lending, feel free to contact one of our experienced peer-to-peer lending team members today.