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How Similar Are Crowdfunding and Peer to Peer Lending?

13 April 2020 No Comment

Crowdfunding and Peer to Peer lending are two modern-day ways for an individual to develop their investment portfolio. Peer to Peer lending began in the early 2000s in the UK, with equity crowdfunding following suit in the early 2010s.

We asked Kuflink’s Investor Relations team to give an overview of these two tech-driven investment avenues, noting key similarities and differences.

What is Peer to Peer Lending?

Peer to Peer platforms are known as one of the best online investment options out there. Peer to Peer lending platforms pair up willing lenders (or investors) with individual and business borrowers, offering a quick and accessible service. Peer to Peer platforms are in charge of providing responsible investment opportunities, protecting both borrowers and investors*. Some Peer to Peer loans are secured by property assets, to which the provider might hold first charges. 

Innovative Finance ISAs (IF-ISAs)

Innovative Finance ISAs, first introduced in 2016, are a relatively new way to invest via Peer to Peer lending and allow an investor to earn tax-free returns from their yearly contributions, up to the overall ISA allowance.  However, it is important to note that IF-ISAs do not come with FSCS protection, making them a higher risk investment option; returns are not guaranteed and subject to HMRC rules.  

What is Crowdfunding and How Does it Work?

Crowdfunding is a means for businesses, individuals, and causes to raise funds using an online platform. It has become a popular way for start-ups to earn some early funding and boost the confidence of prospective investors and venture capitalists. 

With crowdfunding, the investment is typically made in exchange for a share of equity in the business. Other benefits may include non-financial perks like free product samples or access to special events. Lenders and borrowers can communicate directly with each other, making this a very personal investment option. 

Crowdfunding vs. P2P Lending

Crowdfunding and Peer to Peer lending share a few similarities, as well as some notable differences.

A similar investment process

Crowdfunding and Peer to Peer lending are similar in that they both happen via modern online platforms. Both offer borrowers an alternative to the traditional bank loan, and give investors the ability to make and manage their investments quickly, efficiently and remotely.

However, while both these investment options share a likeness, they also offer different overall experiences.

The investor-borrower relationship

With crowdfunding, borrowers are pitching directly to potential investors who are required to do their own due diligence and ensure that the investment is worthwhile. This typically makes the relationship between investors and borrowers closer, as both parties are directly responsible for each other in the process. 

With Peer to Peer lending, the platforms are responsible for making sure that borrowers can service – and eventually pay off – their loans. There are clear rules around loan servicing, repayments and (in the worst-case scenario) asset recovery, to mitigate the investor’s exposure and, where regulated, that FCA rules and regulations are adhered to. Investors who don’t have the knowledge to single-handedly select opportunities would typically have options available to automatically diversify their investment. This could help those with limited investment experience.

Loan based vs. equity based

The biggest difference between crowdfunding and Peer to Peer lending is that the former is equity based, and the latter is loan based. With crowdfunding, the monetary value of equity is dependent on the performance of the business.

Peer to Peer investors need to be able to commit to fixed-term investments – for example of one, three, or five years. Crowdfunding, on the other hand, doesn’t have an end date. Investors get to decide how long they want to hold onto their equity for. 

Modern Day Investing

Crowdfunding and Peer to Peer lending are two modern-day ways for an individual to invest their money via user-friendly online platforms. Although both investment options offer exciting opportunities, your capital is at risk.

*Capital is at risk. Kuflink is not protected by the Financial Services Compensation Scheme. 

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