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P2P Lending and Crowdfunding – Explore the New Frontier for Small Business Lending

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P2P Lending and Crowdfunding – Explore the New Frontier for Small Business Lending

By Caron_Beesley, Contributor
Published: May 29, 2012 Updated: May 29, 2012

Looking for capital to start or grow your business? Sometimes, even with a solid idea and business plan, finding third party financing can be a challenge for many small business owners.

So where are startups and growing businesses finding the funds they need?

According to a Kauff­man Firm Survey, one-third of young firms do not use capital injections. Instead, they rely on owner investment or nonbank sources of funds, with the most frequently used source of startup dollars being own­ers’ and relatives’ savings (source).

But if you don’t have savings to fall back on, another financing option worth considering is peer-to-peer lending or crowdfunding (also known as crowdsourcing). Both combine lower interest rates or creative repayment terms that might just be worth looking into.

What is Peer-to-Peer Lending?

Peer-to-peer-lending (P2P) essentially involves sharing your idea to other people in hopes they will invest in your business. Sites like Prosper or Lending Club connect people who want to lend money with those who need to borrow money – often in increments as low as $25. Quite literally, you determine how much you need to borrow, define the purpose of the loan, and post your listing online.

What’s in it for the investors? Well, returns can be in the range of 10 percent across their portfolio, creating a steady stream of income, not to mention the altruistic payoff of helping businesses succeed.

Obviously, you can’t just cross your fingers and hope for the best when you post your listing. Some factors that can sway your investment-worthiness include these:

  • Have a plan – It’s more than just describing what you’re going to do with the money; it’s important to share findings from market research, competitive analysis, financial forecasts, expected returns, and so on. Here are a few tips for creating a business plan (obviously you can’t share it all, so be sure to have a clear synopsis).
  • Tell your story – What’s your background? What are your dreams for your business? This will help humanize and frame your case.
  • Share your achievements and progress – What have you invested in your business already? At what stage is your business? What landmarks have you already achieved? Potential investors will want to know how invested you are in your business and that their investment in you will pay off.

P2P lending sites are also a useful way to structure loans from friends and family. Because the P2P service acts as an intermediary or broker, it can help remove any potential emotional complications from the transaction while giving the lender some reassurance that you will repay on time.

What is Crowdfunding?

Crowdfunding is a collective cooperation of people who network and pool their money and resources together, usually via the Inter­net, to support efforts initiated by other organizations. While P2P lend­ing typically focuses on one individual lending to another, crowdfunding – as its name implies – aims to reach a fund­ing goal by aggregating many small investors.

Since President Obama signed the JOBS Act in April 2012, it has become a lot easier for small businesses to raise money online via crowdfunding. Previously, small businesses were limited to seeking investment from SEC accredited investors only; now non-accredited investors (i.e. you and I) can invest in a startup to the tune of up to $1 million a year.

One example of a hugely successful non-profit crowdfunding venture is Kiva.org. Kiva works with microfinance institutions on five continents to provide loans to people without access to traditional banking systems, including U.S. businesses.

While Kiva requires that you repay the loan over time, most crowdfunding opportunities aren’t loans and, as such, don’t involve traditional forms of repayment and interest. Instead, borrowers offer a form of payback or reward to encourage people to make the investment. 

One example is the funding model established by Kickstarter. If your business is of the creative kind – art, technology, film, photography, music – Kickstarter is a way to source funds from others.  In exchange for investment (often as little as $25), borrowers “reward” investors with compelling returns. For example, a share in your business or even access to limited edition works, free products, invitations to parties and events, anything you believe is an attractive enticement.

Other crowdfunding sites include Wefundercrowdfunder, and RockthePost.

Other Forms of Financing

Most startups don’t need a lot of financing. In fact, government data shows that 40 percent get started with less than $5,000. If your funding needs are small, consider a microloan (such as SBA’s Microloan Program), or use a business credit card to make larger purchases or bridge the gap until you’ve secured funding from other sources. You should also consider diversifying your funding sources, giving you a better chance of reaching your goals.

Related Resources

 

About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

Please review our Community Best Practices (http://www.sba.gov/community/discussion-boards/community-best-practices) for more information about how best to participate in our online discussions. Thank you.
Foodie Crowd Funding has just launched to assist food related businesses with capital support funding without giving up equity. We focus exclusively on the food biz- assist Seekers with developing a compelling presentation, interesting PERKS and getting their project up - We also assist with support to help grow their business with services- sales channel and distribution growth. We're here to help small to mid-size food businesses.
This years big must-attend event put together by the Professional Crowdfunding Association (non-profit), will be held in Orlando FL on Aug 8th and 9th. For more info on the event you can visit: This post was edited to remove a link. Please review our Community Best Practices for more information about how best to participate in our online discussions. Thank you.
Thanks
Thanks for an excellent and easily accessible article.
Great post. I would add that people with online retail businesses should check out Kabbage.com as well. They offer loans on inventory. This makes it possible to pay back the loan after you've sold the inventory. I have not heard about Wefunder, or RockthePost. Thanks for the info.

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