Owning and operating a small business can pose several challenges, from staffing issues to inventory control. However, the leading challenge for most SMEs is the ability to attract finance and capital investment for their operations.
SMEs often struggle to find and secure the right finance to help sustain and grow their business. This is where crowd sourcing and peer-to-peer (P2P) financing platforms have succeeded in filling a gap, gaining traction as a viable alternative to traditional lending, bank loans and brokers.
Bringing together investors and borrowers via an online platform, crowd-funding is typically more common for start-ups, while P2P is great for established SMEs that are looking to grow.
The crowd-funding concept pools resources from multiple individuals to gather financing for a project, or the development of a new product or service. Individuals who contribute money for a crowdfunding campaign can donate or get rewarded with gifts and incentives.
A benefit of crowdfunding is that it can raise awareness of an idea, start-up or existing business through an increase in promotion and marketing activity. It often provides exposure to a wider audience and can attract new customers.
Another benefit is that the money does not have to be repaid, however, you do need to deliver on the rewards and incentives offered. If you are offering products or merchandise it is therefore crucial to factor these quantities into stock management and inventory control.
Months of preparation can go into a crowd-funding campaign without the guarantee of a result, If the funding goal is not reached within the set time-period, the funds are not disbursed. The planning and preparation that goes into a crowd-funding campaign does however, give the business the opportunity to review and clarify business objectives and to rewrite their business plan, if necessary.
P2P lending has some similarities to the traditional lending and borrowing model where the borrower will use the borrowed finances and repay lenders with interest. Investors and borrowers are connected through an online facilitator. Together, investors pool together finances for borrowers.
P2P platforms offer speed, flexibility, transparency and efficiency. The application process is far more convenient with SMEs able to apply online, outside of business hours and funding agreements generally take only 7-14 days.
For P2P, lenders are taking a greater risk. They are looking for opportunities that provide a good return on investment and businesses that demonstrate good inventory control often exhibit lower operational costs and greater profitability. P2P lenders are increasingly likely to invest in those businesses that have been operational for two or more years. They typically have a genuine interest in supporting projects that assist the local community and economy.
Like traditional lenders, these loans tend to carry higher rates. However, in the P2P arena, interest rates are adjusted to your credit rating or credit score. The higher your rating the better the interest rate you will be offered.
What this means for SMEs
Many SMEs can be put off by alternative platforms due to a lack of understanding of the technology or a lack of trust in the service. As with any other lending arrangement, crowdsourcing and P2P both have their own verification processes.
There are many tools and resources available online to explain the differences and similarities of online lending platforms. Before committing to any leading agreement, it is prudent to first familiarise yourself with the fees and features of individual sites.