recognition, or the joy of supporting a project you are passionate about). An example of this is blockchain lending and the incorporation of smart contracts in P2P lending.
Crowdfunding Models: The Main Types of Crowdfunding
The main crowdfunding models are debt-based crowdfunding, equity-based crowdfunding, reward-based crowdfunding, and donation-based crowdfunding. As compensation for their financial risk, crowdfunders can receive either a tangible reward (e.g. In some instances, car or home loans can be fairly cheap with low interest rates and low risk, since the purpose involves a tangible asset.
In general, lending money to consumption can be a very risky affair, especially if you are lending money to someone who is going to use it on something that is not a tangible asset. Financial Conduct Authority: “Crowdfunding is a way in which people and businesses (including start-ups) can try to raise money from the public to support a business, project, campaign or individual.”
Crowdfunding Terminology: P2P Lending, Crowdlending or Marketplace Lending?
If you are new to crowdfunding, finding your way around the different crowdfunding types can be confusing, especially as different terms are often used to describe the same type of crowdfunding business model. Also, because many crowdfunding platforms offer secondary markets, the difference between a debt security and a loan agreement is unclear, why we prefer the broader term of debt-based crowdfunding to a term focused solely on lending.
Because the crowdfunding market is developing rapidly and in many cases are characterised by fast incorporation of new technologies, most categorisations of crowdfunding are provisional and new ones are added regularly. The main reasons for businesses to use crowdlending instead of bank loans are speed, availability and simplicity.
You can read more about P2P business lending in our article SME Business Crowdlending: Finance for the Future.
P2P Real Estate Lending
P2P real estate lending is also known as property lending and it involves individuals or institutional investors that provide a loan secured against a property. This type of debt-based crowdfunding is characterised by individuals or institutional investors providing loans with consumption as purpose to a natural person (as opposed to a legal entity such as a business, a non-governmental organisation or a public organisation).
P2P consumer lending provides financing for personal and household purposes and usually involves unsecured loans that do not require the borrower to put up any collateral. Compared to P2P business lending that usually relies on the assets of a business to generate income, P2P consumer lending is dependent on a single person or family’s household income.
You can read more about P2P consumer lending in our article Consumer Crowdlending: From Niche to Mass Market.
P2P Business Lending
P2P business lending is also known as marketplace business lending and business crowdlending. This type of debt-based crowdfunding is characterised by individuals or institutional investors providing secured or unsecured loans to a business. However, lots of different terms are being used to describe crowdfunding and it is not always clear how crowdfunding and its many subcategories should be understood and defined.
In this article, we will provide simple and clear answers to the questions many investors and seekers of funding have asked themselves: What is crowdfunding? How does crowdfunding work? And what is it used for? Also, we will make sure that you understand the basics of the most important crowdfunding models: Lending-based crowdfunding, Equity-based crowdfunding, Reward-based crowdfunding, and Donation-based crowdfunding.
What is Crowdfunding?
Crowdfunding is a technology-enabled financial service that has grown increasingly since the beginning of the 2000s, closely tied to the development of the internet. Pay-day loans are often the most expensive type of loan with the highest interest rates (and also carry the highest risk). However, across most crowdfunding definitions three main elements can be identified: 1. The crowdfunding phenomenon covers a wide range of ways to raise money (or other resources) from the crowd for specific purposes through an open call. Or should I say crowdlending? Or maybe marketplace lending? Or what about using debt-based crowdfunding that we just learned is one of the four main types of crowdfunding? The point is, of course, that all four terms (and there are more out there) describe exactly the same business model, so do not get confused about the many different terms flying around.
Another example of terms that are used interchangeably to describe the same crowdfunding model are crowdinvesting, investment crowdfunding, crowdequity and equity crowdfunding.
To a large degree, the differing in the terms used is country-specific. Borrowers are often small and medium-sized enterprises, who in recent years have started to view P2P business lending as an attractive alternative to more traditional ways of raising funds. Thus, based on the rights of funders in the specific project or venture, crowdfunding can be categorised into four overall crowdfunding models illustrated in the figure below.
These crowdfunding models with subtypes will be explained further in the section “Crowdfunding Models: The Main Types of Crowdfunding” that you will find later in the article.
Towards a Definition of Crowdfunding
Because of the many different crowdfunding models and the rapid development of the industry, definitions of crowdfunding are often limited and so far no comprehensive definition of crowdfunding has been widely agreed upon in the industry.
Crowdfunding is an industry in rapid growth all over the world, with great potential for both investors and individuals or businesses looking for funding. The borrower can be either a consumer or a business. For example, the European Banking Authority prefers the term lending-based crowdfunding, the UK Financial Conduct Authority prefers loan-based crowdfunding, whereas marketplace lending has become standard in the US.
To avoid confusion and create a clear division between the different types of crowdfunding and their characteristics, we will instead follow the terminology suggested by the Cambridge Centre for Alternative Finance and use the terms debt-based crowdfunding and equity-based crowdfunding in this guide to crowdfunding. It is impossible to sell a family’s vacation from one year ago or other already consumed intangible “assets”. However, this can largely be explained by a hugely dominant market share on the Chinese crowdfunding market – by far the largest crowdfunding market in the world.
To get a more nuanced picture, we must look at the different regions around the world. This allows capital seekers to raise funds from a large number of capital givers through online crowdfunding platforms acting as intermediaries, instead of raising finance from traditional funding sources like banks, mutual funds or business angels.
What crowdfunders (investors or donors) get in return for their money depends on what kind of crowdfunding model is being used to raise funds. Here, according to numbers derived from reports produced by Cambridge Centre for Alternative Finance (CCAF), debt-based crowdfunding models account for the following share of the overall funds raised with crowdfunding:
99.7% of the Chinese crowdfunding market
93.3% of the American crowdfunding market
89.8% of the UK crowdfunding market
83.5% of the Asia-Pacific market without China
79.1% of the European crowdfunding market
Below, we will briefly describe the most important types of debt-based crowdfunding with suggestions for further reading. interest payments, ownership in the business or a finished product), or an intangible reward (e.g. However, some loans can be backed with collateral in for example a car or another tangible asset.
The loans provided in P2P consumer lending all have consumption as their purpose, which can cover a wide variety of lending types, such as pay-day loans, wedding loans, travel loans, student loans, car loans, and refinancing. The list will be updated continuously as new business models emerge.
P2P Consumer Lending
P2P consumer lending is also known as marketplace consumer lending and consumer crowdlending. In simple terms, crowdfunding is a way of raising funds from the public for either a business, an individual, a project, or a campaign. A great number of funders are involved in the financing (the crowd); 2. There is an open call to participate in the financing.
To give you an idea of how important regulatory institutions around the world define crowdfunding, we have compiled some of the most common definitions used in the market below:
The European Commission: “Crowdfunding is an emerging alternative form of financing that connects those who can give, lend or invest money directly with those who need financing for a specific project. Also, repayments usually rely solely on the borrower’s ability to generate a salary-based income. The loans are usually only covered by a personal guarantee and will typically have a wide range of interest rates, depending on purpose, compared to 100% collateral backed loans. An online platform facilitates and promotes the contact between the providers and the seekers of capital; 3. Securities and Exchange Commission: “Crowdfunding is an evolving method of raising money via the Internet to fund a variety of projects.”
The U.K. Thus, debt-based crowdfunding accounts for a total of 99.6% of the worldwide funds raised through crowdfunding. In the latter case, the funds raised are provided as a pure donation.
In the categorisation of crowdfunding, an important distinction can be made between investment crowdfunding and non-investment crowdfunding. An example of this is P2P lending. This distinction highlights a fundamental difference between crowdfunding where funders act as investors aiming to achieve an economic return and crowdfunding where funders are either aiming to support a charitable project or receive a non-monetary reward. In this section, you will find descriptions of each crowdfunding model, their subcategories and their characteristics.
Debt-based crowdfunding is characterised by investors providing funds in exchange for the right to have their money paid back with interest according to the repayment terms specified in a loan contract or debt security.
The latest worldwide data available on the crowdfunding market shows that debt-based crowdfunding is the dominating crowdfunding model in the world when it comes to volumes raised. It usually refers to public online calls to contribute finance to specific projects.”