Peer-to-Peer Funding For Early-Stage Ventures: How To Get Capital From Individual Investors

Peer-to-peer funding for early-stage ventures is a suitable option when entrepreneurs need a small amount of money to get started. Alternatively, they may need small infusions of funds to use as working capital. Or to tide them over until customers clear their accounts receivables.

Typically, angel investors and venture capitalists may not want to invest in these microloans. Applying to banks doesn’t make sense because of the hassles of getting small funding amounts. On the other hand, the amount could be too big to charge to a credit card or line of credit.

Peer-to-peer funding can bridge the gap and keep the startup running until the next funding round. You’ll sign up on peer-to-peer or P2P platforms that connect lenders and borrowers to get these loans. Lenders are usually small investors looking for viable opportunities to invest.

Although not exactly a crowdfunding strategy, P2P lending has some similarities. You might also call it debt-based crowdfunding, social lending, or crowdlending. More than 300 such platforms are operating worldwide, currently offering backing to startups at pre-seed, seed, and early stages.

Historically, these platforms emerged during economic downturns when startups found it very challenging to get funding from traditional sources. Technology and the Internet have been the driving forces that have spurred the rapid growth of this channel.

Let’s Check Out Some Statistics

Experts anticipate that the peer-to-peer lending market worldwide will likely grow at a CAGR of 28.1% from 2023 to 2032. Reports suggest that the P2P market reached a valuation of $75.8B in 2022. In the next 10 years, the figure will stand at $621.3B. By the year 2034, the value will touch $$1,709.6B.

Prosper, Funding Circle, Upstart, and Lending Club are among the market’s top players. Interest rates are typically higher than other finding options and may range from 5% to 9%. Depending on the specific platform or borrower startup and other conditions, the interest can be as high as 10%.

The maximum loan amounts can be $35K and are available without the need for collateral. This factor raises the risk, which investors offset with high interest rates.

However, these amounts are just ideal to kickstart and get the startup off the ground. Entrepreneurs can make payments once the business starts to thrive and generate revenues.

Understanding Social or Peer-to-Peer Lending

Startup founders needing small capital infusions can approach peer-to-peer platforms designed for small borrowers and lenders. These platforms eliminate middlemen, banks, and financial institutions.

The platform enables them to enter into lending transactions that benefit both parties. Entrepreneurs and small business owners who typically face barriers to traditional bank loans can consider peer-to-peer funding for early-stage ventures.

Such loans don’t involve due diligence or complex screening procedures, which is a plus for founders still finding their feet. Investors can benefit from higher returns than they can expect from other investment options.

Both parties can conduct the transactions online without complicated application protocols. Loan terms are short, which makes them ideal for quick R&D or side projects that founders may want to try.

Or to cover the gap between payment due dates. Entrepreneurs can quickly repay when the clients make payments.

Although interest rates are higher than those of other conventional funding sources, they are lower than those charged by credit cards. Unsecured loans also charge higher interest rates than P2P platforms. Most importantly, founders are only accountable for the payments they must make on schedule.

Investors don’t expect compensation through stock and equity, nor can they claim voting rights or board seats. Essentially, P2P loans are short-term advances that founders can use and repay within a fixed due date.

They need not specify the purposes for requesting the loans, nor are there any conditions for the money’s use. This factor lends flexibility to the transaction. Approvals typically come in within a short time, and the application process is quicker than most banks.

You’ll see the loan amount credited to your bank account within a short time.

How Peer-to-Peer Funding for Early-Stage Ventures Works

If you’re ready to explore this short-term funding option, here’s what you’ll do for peer-to-peer funding for early-stage ventures.

1. Research several online platforms and understand their terms and conditions and SOPs. Also, study the kind of startups that work on them and other information. Ensure that your PII is secure and that no technical glitches will interrupt the lending process. Reliability and cybersecurity should be high on your list of priorities.
2. You’ll create a profile complete with personal and financial details. Your income, credit scores, and purpose for applying for the loan are also needed. The platform conducts a hard credit pull and verifies your identity through your submitted documentation.
3. Next, you’ll create a listing to inform potential investors of your requirements. Put down the loan amount you need, the expected range of interest rates, and the loan term you prefer.
4. Lenders and small investors check the lists for projects that interest them and offer partial or complete funding. Founders can expect to have multiple investors accept a specific listing.
5. You’ll read the transaction terms before accepting the loan. Once the transaction is complete, the lender receives monthly payments and interest after deducting the lending platform fee.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Factors to Keep in Mind Before Accessing Loans

Although peer-to-peer funding for early-stage startups is a great solution, you’ll keep several factors in mind. Here are some of them:

• P2P loans are not secured by collateral, which raises the risk factor. You’ll only take loans that you’re confident of paying back.
• Make sure to research the platform for credibility before signing up. Check its track record and reviews posted by founders and investors.
  Interest rates on P2P loans are typically high, so you’ll ensure they’re reasonable. Consider scouting other platforms and comparing interest rates before selecting an economical option.
• Read the platform’s terms and conditions carefully for unfavorable nuances. Read the fine print, and don’t hesitate to ask questions to confirm you know exactly what you’re getting into.
• Work out the startup’s budget to ensure you can make monthly payments. Factor in the interest rates.
• Before signing up, check for the minimum credit scores the platform accepts. If your credit rating is low, you’ll work on building it to avail of favorable interest rates.
• Applications on crowdlending platforms are not always successful. Have a backup plan ready in case your request is rejected. Allocate the money only after you see it in the bank account.
• Crowdlending platforms levy a 5% closing cost fee, which they’ll deduct from the loan amount. Remember to calculate it by deducting it from the final amount you’ll receive. Also, ensure transparency and that no hidden charges are applicable.
• The maximum loan amount is $35K, which may not be adequate for your funding needs. Particularly if you intend to invest in heavy machinery, a large inventory, or premises.
• Transactions are not with financial institutions but between individual investors and borrowers.

Perks of Accessing Social Lending Funds for Your Startup

Peer-to-peer funding for early-stage ventures has several benefits for a fledgling business getting off the ground. Here’s what you need to know.

• Loan agreements are between individual investors and founders, which eliminates middlemen and traditional institutions.
• You’ll make fixed loan payments over fixed intervals, enabling careful budgeting of your costs and expenses.
• Accessing this form of funding is typically easier and quicker than other fundraising options.
• P2P loans are a form of debt financing and don’t involve giving up equity or dilution. Founders are only liable to pay interest on the money they borrow.
• Startups with few assets to offer as collateral or not-so-great credit scores can get funding for their innovative ideas.
• Interest rates are lower than on credit cards and lines of credit.
• Even if the startup does not have an impressive track record of taking loans, it can access funding.
• Crowdlending platforms may be open to funding disruptive ideas that demonstrate potential for rich returns.
• Founders can negotiate flexible terms and conditions and repayment schedules. This factor can be a huge benefit for startups that have unpredictable revenues and cash flows.
• Social lending platforms don’t have any overhead costs, so transaction fees are affordable.
• Founders can repay the loan before due dates without the risk of incurring penalties for prepayment.
• P2P funding platforms are entirely digital, without documentation and paperwork. The entire transaction is completed via online forms and digital signatures. The loan amount is simply credited to your bank account.
• Founders can build a credit reputation on the platform. Having successfully taken and paid back a loan, accessing funding in the future is easier. You can quickly access short-term capital in an emergency with a few clicks of the button.

Risks of Tapping Social Lending Platforms for Loans

As with any other funding option, peer-to-peer funding for early-stage ventures comes with its share of downsides. Understand the possible risks carefully before accepting the loans.

• Not all states permit P2P lending, so research the regulations before signing up with a platform. You’ll confirm that it is authorized to make loans in your location.
• Borrowers should be confident of their ability to repay the loan before taking it. Non-payment comes with repercussions like asset seizure, wage garnishment, and/or even jail time.
• Interest rates could be higher if the lenders see a higher risk. Founders may want to shop around for cheaper loans before accepting offers.
• Be aware of the possibility of fraud and scams when transacting on a P2P lending platform. Always work on reputable platforms like SoFi, Street Shares, Lending Club, and Funding Circle. Also, do your research and check reviews.
• Be wary of cybersecurity issues and do whatever it takes to secure your PII and other sensitive information.

If you’re reading about P2P loans, chances are you’re scouting around for information about starting a company. Check out this video I have created explaining the next steps to take when you have a great business idea. It will help you get started in the right direction.

How to Maximize Success Rates on Peer-to-Peer Lending Platforms

If you intend to get P2P funding for your company, use the right strategies to ensure success. You can consider it a good trial run for future fundraising initiatives when approaching investors for capital. Here’s what you need to do.

• Remember to treat this funding drive like a conventional pitch deck founders create. You’ll build a compelling profile that impresses potential investors with financials, business plan, target customer base, and sales projections. However, refrain from presenting details about the product portfolio you’re creating or any business secrets. Social lending platforms are open to the public, so be selective about the information you reveal.
• Build relationships with investors by adding social media profiles, images, and videos. Engage them by posting replies to comments and queries as soon as they appear.
• P2P lending platforms don’t require you to reveal the purpose for which you’re raising money. However, talking about your plans to start a business doesn’t hurt. Investors will be more likely to accept your pitch if you have a robust strategy for growing the business and making profits.
• Be upfront with lenders at every step. If you can’t make payments on time, be sure to inform them of a timeline for when you can make payments. Once you commit to a payment date, honor the deadline.
• Adopt lean operating methods to stretch every dollar and maximize profits from the loan.

To Conclude

Peer-to-peer funding for early-stage ventures can be a good source of capital while you’re still exploring the business concept’s viability. Consider this funding source to supplement bootstrapping or advances from friends and family.

You can experiment a little with the small loan, which is easily payable in small installments if your idea is unsuccessful. You’ll also get an introduction to funding strategies, connecting with investors, and creating a compelling pitch deck.

Once the idea starts to take off, you can approach angels, VCs, family offices, or PE firms to support the venture. Reaching out to incubators and accelerators is also an option. While P2P loans are a great starting point, ensure you have the resources and capability to repay the money.

Non-payment can reflect poorly on your credit score, influencing your credibility when you start a more successful business later. Research extensively before taking on this debt.

You may find our free library of business templates interesting as well. There, you will find every template you need when building and scaling your business completely for free. See it here.