Club Insider

The Financial Power of The Crowd

Part II

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Stephen TharrettStephen Tharrett

In Part I of this 2-part series last month, readers where introduced to crowdfunding. In addition, Part I provided an overview of donation-based and reward-based crowdfunding. In Part II of our series on crowdfunding, we will introduce readers to the newest crowdfunding mechanisms; debt-based crowdfunding, often referred to as peer-to-peer (P2P) lending; equity-based crowdfunding and royalty-based crowdfunding. These three approaches to crowdfunding are considerably different than donation-based and reward-based crowdfunding, being founded and structured along the principles of more traditional capital raise approaches (e.g., angel funding, venture funding and bank debt).

Debt-based Crowd Funding

Leave it to the financial markets to develop a lending solution that sources the vast wealth of the crowd. Introduced in 2006, debt-based crowd funding, also known as crowd lending or peer-to-peer (P2P) lending, has emerged as a highly viable approach to source growth capital for individuals and businesses. P2P differs from its siblings in the crowdfunding arena in two distinct ways. First, P2P is not a funding source for start-ups, it is only available to businesses (small to large) with a proven financial track record (meaning the business has shown it can generate a profit and pay bills), and second, it does not offer contributors equity, just a guaranteed return on their investment. P2P offers entrepreneurs a fast track for raising growth capital to expand their business. For example, a fitness studio owner who has achieved success with their first studio might consider P2P lending as a means to raise growth capital to open a second studio or develop a franchise model.

Mark WilliamsonMark Williamson

P2P lending offers entrepreneurs access to unsecured loans with more favorable terms (rates vary based on the level of risk associated with the loan) than a typical bank loan, meaning potentially lower interest rates and better covenants. Furthermore, P2P lending opens up lending investments to investors, accredited and non-accredited, who are passionate about supporting your business venture in return for receiving a guaranteed rate of return on their investment. Like any lending establishment, P2P lending platforms require potential borrowers to be vetted before their offer can be shared with the crowd. For example, Lending Club, the largest P2P platform, indicates it approves approximately 10% of the loan applications it receives.

According to, a website focused on the crowdfunding industry, the leading P2P sites include: Lending Club (has sourced over $9 billion in loans since inception in 2007), Prosper ($3 billion in loans handled since its inception in 2006), Funding Circle (the leading online marketplace focused on small business with over $1 billion in loans provided for small business since inception) and Upstart.

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