What B2B Can Learn from the P2P Crowdfunding Model

Digital crowdfunding has gone viral among individuals – a World Bank-commissioned study predicted that P2P crowdfunding could hit $96 billion by 2025, with funds pouring in for ventures ranging from commercial 3-D printing technology development, to video games and movies, to one man raising nearly $10,000 to make potato salad (seriously).

Whether the crowdfunding campaign makes any sense is besides the point – taking your venture online to earn startup cash has been wildly successful in recent years, and is marginalizing banks and venture capitalists. Now, some experts are assessing whether the B2B space can get in on the fundraising action.

New findings from investment firm Payden & Rygel highlight the explosive growth in P2P crowdfunding, stating that since 2009, nearly half of all online, donation- and reward-based funding campaigns have met their fundraising goals.

It’s an evolution that’s disrupting the traditional lending market. Since 2005, the two leading websites in the industry have raised more than $5.5 billion in peer-to-peer loans. Captivatingly low interest rates mean individuals are willing to bear a greater risk with their investments to see big returns – reports say an average return from a P2P investment ranges from 5-12 percent.

It’s unclear, however, how the success of online P2P lending will translate onto the B2B marketplace. Payden & Rygel note in their research that recent legislation largely bars crowdfunding equity for startups in the U.S. Across the globe, only 5 percent of crowdfunding accounts for equity.

But there is still an opening for B2B to benefit from the same mechanisms that have made P2P lending and crowdfunding so popular. The 2008 financial crisis, Payden & Rygel said, has forced startups to explore new ways to raise capital as traditional banks refuse to partake in riskier loans. Lending services like ArchOver and Funding Circle require based investments of about $1,500, but offer more affordable loan rates than traditional banks, making these services more attractive to SMEs.

A survey conducted by American Banker shows a continual decline in the volume of small businesses applying for commercial loans from traditional banks.

As the P2P lending market continues to offer ways to raise funds without a bank, B2B crowdfunding has the potential to disturb the small business lending status quo even further. “The emergence of crowdfunding should encourage investors to take a broader view of what constitutes financial intermediation,” Payden & Rygel conclude, “recognizing, just as in the 1970s with money market funds or the 1980s with high-yield bonds, that the financial system evolves whether or not we think it is right, wrong, dangerous or goofy.”