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Crowd Funding in India - How's P2P Lending Helping Increase Small Business Investments

By Anurag Srivastva | 26 Mar 2020

In India crowd funding is often used interchangeably with P2P lending. While conceptually they appear to be the same, there is an important difference between them. P2P lending creates a debtor/creditor relationship between two parties. There is a lender and a borrower coming on the P2P lending platform striking deals to lend and borrow money. Since it is a debt, there is interest payable on the sum and the principal has to be repaid at the end of the tenure. How does crowd funding differ then?

How crowd funding differs from P2P lending?

Unlike P2P lending, crowd funding is not in the form of a loan. It is either in the form of an assistance provided for a worthy cause without expecting anything in return or it is a platform to participate in the equity of a business. For example, if an aspiring director plans to make a movie on an art subject, there may not be too many financers willing to fund the project due to its limited commercial value. In such cases, the crowd funding platform can be used to invite contributions and promise contributors some benefits after the movie is made. In other words, crowd funding is a participation in the equity of a project while P2P lending is participation in debt.

Can P2P lending crowd fund for small businesses

While crowd funding platforms and P2P lending platforms in India are discrete, a combination of the two can be a big help for small businesses. Here is how one can go about it.

• Small businesses with good project ideas can get their projects crowd funded by like minded investors. Many HNI investors and family offices are looking at opportunities similar to these where they can participate in the equity of promising projects at an early stage. This is easier than approaching the capital markets directly. But how can crowd funding platforms cooperate with P2P lending platforms?
• Most businesses require equity and debt to shore up their capital structure. For example, good business ideas can look to raise equity through the crowd funding platform and plug the debt gap using P2P lending platforms. P2P lending platforms are allowed to facilitate personal loans for business. This can lead to holistic capital issuing.
• When a small business gets an equity investment commitment through the crowd funding platform, this commitment can used as the basis to secure a P2P loan for the interim period till equity funds can be used. This is also safer.
• One more synergy is that a good credit score and track record on the P2P lending platform can be used to assure the crowd funding equity investors about the genuineness of the business person. This can actually hit two birds with one stone.