Peer-to-peer lending has continued to gain traction globally. Business owners have shifted from the conventional borrowing involving renowned financial institutions to adopting the enhanced financial technology models. Peer-to-peer lending provides a platform whereby businesses, as well as individuals, can borrow from each other (Suryono, Purwandari, and Budi, 2019: p. 204). Additionally, available technology advancements have played a significant role in strengthening financial technology applications through various online platforms. As a result, in this digital disruption era, people have been able to connect and use peer-to-peer lending through various online sites as well as mobile applications. It is prudent to note that peer-to-peer lending is guided mostly by moral and ethical obligations due to its flexibility especially, the terms and conditions. Therefore, regardless of its advantages, peer-to-peer lending has its weaknesses. There will be an exploration of various forms of crowdsourcing, its merits, and demerits as well as viability in the business environment.
Different forms of Crowdfunding
Businesses no longer rely on banks only in order to access valuable loans for investments. Crowdfunding has become one of the significant sources that provide firms with much-needed investment capital. As a business model under financial technology, Crowdfunding utilizes social media and websites to lure investors and entrepreneurs who contribute money towards a specific business venture. In affirmation, Sauerman, Franzoni, and Shafi (2019: No Pagination) stipulate that Crowdfunding’sCrowdfunding’s popularity has emerged from its ability to raise resources to be used in entrepreneurial, social, and artistic projects from different sources. A discussion of different types of Crowdfunding will assist in understanding better how investors can facilitate a firm’s growth and expansion.
Donation-based Crowdfunding
Donation-based Crowdfunding relies on a large number of contributors to initiate a business venture. In simple terms, donation-based Crowdfunding occurs when an entrepreneur has a business idea that they intend to actualize. Crowdfunding, through donation-based system facilitates fund solicitation from various contributors. To motivate the donors in some scenarios, the business owner might decide to convert the donations into equity shares while still maintaining business ownership. However, in numerous cases, donation-based Crowdfunding is used in charity events whereby donors do not accept any form of refund or value for their contribution to the business venture (Scataglini and Ventresca, 2019: No Pagination). Nonetheless, to avert confusing donation-based Crowdfunding with other types listed in the subsequent sections of this paper, it will be essential to note that the use of donation-based funding is in relief and non-profit cases.
Reward-based Crowdfunding
Reward-based Crowdfunding is another popular way to raise investment capital for any business venture. Security or buying shares is not possible under the reward-based Crowdfunding. Nonetheless, it is very similar to donation-based funding since the contributor does not expect any refunds or equity. The promise to funders entails a non-pecuniary product in return for their contribution (Motylska-Kuzma, 2016: PP.601-605). It seems like the donors get a valueless return in this crowdfunding type. However, it is very popular around the world. The reason being, it is similar to a customer pre-ordering a commodity before it is released in to the market. Also, the business founder is able to access valuable feedback from the targeted contributors who offer valuable feedback in terms of product design, price, and use in the market. Thus, it is more of a community-based initiative whose main objective is not just fostering imperative creativity but also actualizing ideas and projects off the ground. In support, Chan, Park, Patel, and Gomulya (2018:P.1) state that reward-based Crowdfunding is popular with start-up projects where backers exchange fund contribution with a pledge for future products.
Equity Crowdfunding
Equity crowdfunding ensures that investors get both security and value for their contributions. In the digital realm, entrepreneurs advertise the selling of their shares with the intent of attracting a large number of investors (Kuti, Bedő, and Geiszl, 2017: p. 188). This model of crowdsourcing allows investors to acquire stakes and equities in the companies that they contribute. Also, Marks (2019: No Pagination) states that companies sell securities and stakes in terms of debt, revenue shares, convertible notes, and etcetera, where investors target incurring profits.
Debt Crowdfunding
Debt crowdfunding offers an alternative option to using banks to acquire loans. In this model, the investors offer promising business capital to grow and expand. In return, they can get dividends or interests from their loans. Unlike donation or reward-based crowdsourcing, a business has to offer personal guarantee or security as the lender has to get their invested amounts back. Usually, there is a credit contract that both parties agree to.
Summary of the types of Crowdfunding
Type of Crowdfunding
Key Feature
Donation-based
Donors send money without agreement or securities. They do not expect payback
Reward-based
In exchange for capital, investors get a non-financial return, usually the company’s product.
Equity
Funders expect shares and equities in the company.
Debt-based
The investors expect their money back with added value.
Advantages of Crowdfunding
There are multifarious advantages associated with Crowdfunding. First, there are no upfront fees required to access capital from potential investors. All an entrepreneur requires is a platform to access funders. Therefore, a business does not incur any extra costs. Additionally, it will be prudent to note that financial technology has embraced the application of online platforms in search of investors. Thus, it paves the way for businesses to market themselves as they pitch their ideas to funders and other germane stakeholders. In the end, people are attracted to the business before it ev4en takes off, securing a few potential customers in the process.
As indicated before, most Crowdfunding is set-up as community projects. Since they are on social media where there is a vast audience and target everyone, an investor can get valid and valuable advice as well as feedback. Thus, one can improve product manufacture and delivery. Additionally, an entrepreneur can gauge the people’s reaction to the business and discern whether or not the venture will perform exemplary well in the market.
Investors can track an organization’s progress. Some influential investors can offer valuable input that can enable the business to grow. Such a move creates added value for all stakeholders. Also, it is essential to note that some businesses that might not get funding in conventional loan environments appeal to investors in financial technology models. The reason being, they are ready to take risks that financial institutions cannot afford to. Still, on investors, they can become indispensable and most loyal customers who are willing to invest even more and increase their shares, equity, and value.
Disadvantages
In crowdfunding platforms, it is vital to create interest in the business opportunity that one seeks to launch. However viable and splendid the idea is, failure to generate the right amount of interest from the funders, no investments will be forthcoming. Furthermore, it is difficult to get on crowdfunding platforms like kickstart or even get donors. In the traditional style of acquiring banks, it is more convenient and easy to pitch ideas to relevant authorities.
There is a set target in terms of funding. The failure to attain the minimum amount means that the entrepreneur gets nothing. Also, if a business fails, then one damages its reputation and diminishes the opportunity to get future funding. Furthermore, it is vital for an entrepreneur to patent their work to avoid the risk of having their ideas stolen, leading to not just their loss but also for the investor.
Some business ideas attract a behemoth of investors. Hence, more investment capital for the start-up owner. However, if the number is too large and all expect equity or charge interest, it could adversely affect the business. The owner, in some incidences, might end up losing the firm.