The terms “crowdfunding” and “peer-to-peer” (or “P2P”) lending are often used interchangeably, but this is a mistake. It is true that P2P lending originated as a niche form of crowdfunding, but it quickly became its own unique, and rapidly growing, industry with distinct legal and structural challenges.
Like other forms of crowdfunding, P2P lending involves a business or entrepreneur seeking money from the crowd as opposed to other sources of capital, such as angel investors, venture capital funds or traditional lending institutions. That is basically where the similarities stop. What makes lending unique from other types of crowdfunding is that investors are in fact lending money to the business or entrepreneur with the expectation of being repaid, over time, with interest. P2P lending is particularly popular with entrepreneurs and businesses that don’t want to give up equity in their start-up companies, (for example, in exchange for angel investment or as part of an “equity based” crowdfunding campaign), or who simply do not have access to more traditional types of loan facilities. On the flip side, this form of crowdfunding is extremely appealing to investors because the potential return and investment time frame are both known at the outset in terms of the interest rate and the maturity of the loan (which is often short-term). Moreover, investors often receive regular payments of interest and principal over time, thus decreasing the overall risk of the investment—particularly in comparison to “equity based” crowdfunding investments (where an investor is purchasing an equity interest in a business), where the potential return to an investor, if any, will not be received until the occurrence of some future event such as a buy-out event or sale of the underlying assets.
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