Crowdfunding

Many people associate this kind of crowdfunding with charities and the arts, where people donate because they believe in the cause. An obvious example is charity fundraising, and people give money and get nothing in return because they’re happy to support the organisation.

Many crowdfunding websites offer a variation of this concept where a reward is provided for donating—for example, a business offering pre-orders for an innovative product months before it’s available. Donation and reward crowdfunding works well for some companies but is perhaps less relevant for others, depending on their industry.

With peer-to-peer lending (also known as P2P), the business borrows money from a collection of individual lenders and pays it back with interest. These crowdfunding sites act as the gatekeepers, so while they're not directly lending money to the business, they still have an underwriting team to assess risk for the individuals lending via the platform. For this reason, peer-to-peer lending is similar to a traditional unsecured business loan in terms of eligibility.

Some P2P lending platforms allow individual lenders to 'bid' for the project, which means the business might get a better interest rate than if they went direct to a single provider. It's also beneficial for the lenders because they have an alternative to more traditional investment channels and may make a higher return.

Like peer-to-peer lending and mezzanine finance, investors take equity (or shares) in the business rather than repayments for a loan. This means that, despite operating at a higher risk (and no defined timeframe for getting their money back), investors have the chance of a better return if the company is a success. It also means they're investing in the future of a business rather than simply providing a short- or medium-term loan.

Equity crowdfunding can be a good option for businesses that want to raise money for growth but aren't eligible for a loan or don't want to take the risk of agreeing to a repayments schedule. Other firms won't want to give up equity in their company and prefer to raise money using debt instead.

Property crowdfunding takes the concept of peer-to-peer finance and combines it with property investment. Some variants allow individuals to invest in small shares of many different buy-to-let properties, while others are aimed at the commercial property finance market.

The latter are essentially peer-to-peer platforms that specialise in property development finance. In other words, property businesses that want to borrow money for a specific project can raise funds via individuals who wish to lend to property firms. One key difference is that property crowdfunding is typically secured, making sense as the sums of money involved tend to be higher.