What Is Crowdfunding?
Traditional crowdfunding is generally a gift or up-front payment. For example, charitable crowdfunding sites feature people talking about their current predicament and asking for money. They get the money and use it however they choose. Crowdfunding for projects may only go through if the requestors reach their crowdfunding goal. If the project is funded, the donors may get T-shirts, thank you cards or a discount on the first production run of a new product. Loan crowdfunding came later but has become almost as popular.
What is Loan Crowdfunding?
Loan crowdfunding is similar to a business loan, but the loan is funded by dozens or thousands of investors. It gives private individuals the ability to make money by loaning money to others. They can mitigate their risk by choosing who the person they invest in, and they can diversify their holdings by spreading out their investment into many different loans. It is more professional, because they aren’t loaning the money to a friend or family member who may give a sob story to avoid making payments. Crowdfunding has many benefits for the borrower, too.
What Are the Benefits to the Borrower by Crowdfunding Loans?
You can tap into a larger pool of donors or lenders than you could if you simply pitched your idea to friends and family. That increases the odds you can quickly raise the needed money or raise a large sum. You can use a wide array of tools to manage the collection of money and sending the payments. That’s hard to do with a private loan, unless you’re going through a bank or credit union. Yet there are risks to crowdfunding loans, both for borrowers and lenders.
What Are Risks of Crowdfunding Loans?
Lenders are aware of the risk that they’re giving money to someone who may not be able to repay it, though they can gauge this by reading the person’s story and doing research. Yet it can be hard to distinguish between the scammers and legitimate proposals. Lenders can mitigate their personal risk by limiting how much they loan and dividing their investment between several loans.
Both borrowers and lenders face the same risk of having their financial information stolen. That is why you should only consider a reputable loan crowdfunding payment solution, one that has excellent security measures. As a borrower, you should research the fees they charge for their service and adjust your funding request accordingly. Choose loan crowdfunding sites that use your preferred payment method. Whether you’d prefer to use Stripe, PayPal or e-checks, make sure you can quickly access the funds and move money into the account to make your monthly payments. You don’t want to lose your lenders’ trust because of delays in payment processing.
The loan itself needs to be structured right. Choose a realistic amount, because the odds it is funded go down as the loan value increases. Choose a realistic timeline. You can run into trouble if you give the loan so long to be funded that you don’t get the money in time.