Are crowdfunding and P2P lending good options for business financing?
Crowdfunding is unique because a business with a great product but less than stellar business plan can still secure funding
While startups traditionally rooted for venture capital as a form of financing, new models are emerging, including venture debt and the all-too-popular crowdfunding. In addition, bank loans are a very common option for small business funding because they’re often the first port of call for single proprietors or small business owners. For the better part of a decade, banks have relaxed their lending conditions, too, so small businesses are finding more success with being approved for a loan.
The potential of peer-to-peer lending
But banks are not the only ones providing funding to small businesses, as they are actually reluctant to lend money to such enterprises in some jurisdictions. In China, for example, state-owned banks are not too fond of lending to individuals and small businesses. However, here P2P lending is a booming market, with around 2,200 p2p lenders and a market valued at US$100 billion.
After one prominent p2p lending startup was outed as a large-scale ponzi scheme, the country’s regulators have tightened its rules for peer-to-peer lending, and this has had some positive impact in terms of reducing fraud and improving the trust factor in the industry.
In fact, some of the prominent p2p lending platforms have gone off to IPO in major equities markets, such as Yirendai, which has listed on the New York Stock Exchange in 2015. The company eyes disbursement of around 100 billion yuan worth (US$15.1 billion) by 2020.
Another company is following in Yirendai’s footsteps. Ppdai.com recently raised US$ 221 million at the NYSE. These major stock market listings show how viable a business model p2p lending is in a country with around 40 percent of the population underbanked or unbanked.
In total, the market for alternative lending in the Southeast Asia and Asia Pacific region is estimated to be around US$245 billion in value annually. For businesses looking for financing,
Crowdfunding: A viable funding option
Another particularly interesting options is crowdfunding — it looks set to take off as it continues to evolve and reach a wider audience.
Crowdfunding is unique because a business with a great product but less than stellar business plan can still secure funding – something that traditional bankers or even peer lenders might not be comfortable with. For that reason, it has become very popular with startups, with a number of funding campaigns going viral.
Some people view crowdfunding as a fad and not a secure source of business funding, but there are plenty of success stories among both software- and hardware-based projects and companies. Before token-based crowdsales became popular, projects would usually list on sites like Kickstarter and Indiegogo, and these were mostly either creative works like games, software, or movies, or hardware-based projects that could not otherwise have been funded.
Also read: Stop blaming the blockchain, crypto and ICO community, but rather join and help them
Today, a popular mechanism for raising funds, especially for technology companies, is the blockchain-based ICO or initial coin offering, where a company would sell crypto assets or tokens that are then used to fund development of the project.
Not all small businesses have the capability to launch their own ICOs, nor build their own blockchains over Ethereum, however. For this purpose, a startup called Starbase will empower any business or individual to crowdfund using cryptocurrencies and tokens without building their own network.
The company aims to address the potential regulatory hurdles that are expected to be a challenge for companies raising funds through crypto assets in the future. Somewhat future-proofing an ICO activity for any small business, the platform also provides marketing, logistics, and legal assistance to businesses wanting to crowdfund.
To date, the total amount that were financed through ICOs for the year has surpassed US$2 billion, with the likes of Filecoin, Tezos, and Bancor.
Crowdfunding has drawbacks
Crowdfunding is not without its drawbacks. Consumer protection watchdogs have noted that crowdfunding is almost completely unregulated, with little protection for both business owners and investors.
As a result, we will likely see regulation introduced over the next few years. We can expect some bumpy roads ahead, as jurisdictions have started clamping down on ICOs, in an effort to introduce regulation in this industry. It is important to note, though, that it’s unlikely that crowdfunding will become as stringent as traditional bank loans, so it remains a viable alternative source of funding for innovative startups.
While crowdfunding may not be suitable for everyone, it is undoubtedly one of the most intriguing developments in business funding in quite some time. It’s yet to be seen whether it continues to gain momentum over the coming years or if it becomes susceptible to the regulation that comes with traditional sources of funding.
There are plenty of other sources out there that a business owner should consider, which may be better suited to the nature and needs of their business. It’s important to sort out your finances early – it sets you up better in the long run, and helps mnimize the risk of cash flow problems later on.
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