6th August 2015 Helen Yuet Ling Pang

What Are The Different Types of Crowdfunding?

What is crowdfunding?

Crowdfunding is a means of raising money to fund a business or project by using small amounts of money from many individuals (the crowd) rather than large amounts from just a few investors, as was the traditional way.

In my last post How Safe is Peer-to-Peer Lending?, I mentioned that there are different types of crowdfunding. These are often not clearly explained by the media because crowdfunding is a new and fast moving industry, and a result this can lead to some confusion among the public.

The 4 Types of Crowdfunding

There are 4 main types of crowdfunding.

Reward and Donation Crowdfunding –

I’ve listed these two types together because the reason for investing is social or personal motivation. People don’t expect much in return apart from feeling good about having helped towards a good cause, whether they are backing their favourite charity or an upcoming film or music project that needs financing. With reward crowdfunding, they may receive some small reward, such as free products or tickets to an event, but there is no financial return as such. You can find reward crowdfunding examples on platforms such as Kickstarter and Indiegogo.

Without knowing at the time, I raised some money as a young teenager through donation crowdfunding. I really wanted to buy a jumper, but when my mother said no, I turned to my school friends instead.

By cheekily asking each one for £1 or £2, I was very quickly able to buy my jumper. And because I wasn’t required to pay the loans back, what I created was an early form of donation crowdfunding, except that I used a clipboard to record all the details and physically collected the coins from my friends because the internet didn’t exist in 1984.

Equity Crowdfunding –

This is where a crowd of people get together to invest in a business or project in return for a share of equity. If the venture is successful, you could receive returns on your investment, but if the business fails, you could lose part or all of your original investment. The Financial Conduct Authority (FCA) regard equity crowdfunding as higher risk than peer-to-peer (P2P) lending and regulates this activity alongside peer-to-peer lending. Remember to check whether the platform you want to invest with is FCA-regulated.

You can find many examples of equity crowdfunding on platforms such as Crowdcube or Funding Circle, where businesses and projects go to raise funds.

Peer-to-Peer (P2P) Lending –

Also known as lending or debt crowdfunding, peer-to-peer (P2P) lending allows individuals to lend money to a business or project in return for their loan back with interest.

This method of crowdfunding allows you a somewhat safer way to invest your money than with equity crowdfunding, as well as a feeling of having helped achieve something collectively. Peer-to-peer lending is a regulated activity by the Financial Conduct Authority (FCA), so check whether the platform you want to lend with is FCA-regulated.

To make matters more confusing, within what is generally called peer-to-peer lending there are further sub-genres with extremely important distinctions.

  • Unsecured Peer-to-Peer (P2P) Lending

    This is where individual consumers are lending to other individual consumers but the loan is unsecured, similar to borrowing on a credit card or payday loan. This type of lending is popular for very small amounts but it is by definition the most risky form of P2P lending because if the borrower defaults then the lender can lose their money. Because of this, some platforms now operate a kind of safety fund to pay back lenders if the borrower doesn’t pay.

  •  Unsecured Peer-to-Business (P2B) Lending

    This is where the crowd is usually made up of individual consumers but you are lending only to businesses. Again the loans are not secured and if the business fails, then as a lender you can lose your money.

  • Peer-to-Business (P2B) Secured

    Again, the crowd is usually made up of individual consumers but you are lending only to businesses. This time the loans are secured, usually against property but sometimes against future invoice receipts of the business, and if the business fails, then as a lender you have a far better chance of recovering your money.

    P2B secured against property by a first charge is by far the lowest risk.

  • Business-to-Business (B2B) Secured

    This is where the crowd is made up of different businesses, often very small companies, who want to lend money for good rates of return with lower risk.

    Crowdahouse falls under this category and we currently operate a B2B lending platform with all loans secured by way of a first charge over property.

Transparency is Key

It’s our aim through our website and social media to help you understand how Crowdahouse works, outlining both the risks and benefits to you. I’m currently writing a glossary of the terms and phrases more commonly used in property and finance, as a supplement to our FAQs. I hope that you’ll find them useful. Please contact us if you have any further questions.

It’s absolutely essential that you know and understand the risks as well as the benefits before deciding whether to take part in peer-to-peer lending, or in our case for now, business-to-business secured lending.

 

  • Helen Yuet Ling Pang

    Director of Operations

    Helen Yuet Ling Pang
  • Helen Yuet Ling Pang

    Director of Operations

    Helen Yuet Ling Pang

About Crowdahouse®
Crowdahouse is a business-to-business (B2B) property crowdfunding platform lending to business borrowers, always secured against property. Instead of lending to individuals, we’ve reduced the risk by offering you the chance to lend only to property businesses. You join a crowd to lend money in return for interest on your money. Your loan is secured with a first charge over property, just like a bank, and you pay no fees as a lender.

 

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