Peer-to-peer lending, however, usually requires a formal application. Most peer-to-peer investors use one of the big P2P 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 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?