Traditional Financial Institutions vs Crowdfunding Platforms


Thanks to the rise of crowdfunding and
peer-to-peer loans, banks and traditional financial institutions are no longer
the only options for credit seekers. If you are looking to secure a loan for
your business, this is great news. You have more choices now. You can easily
find a loan most suitable for your needs.

Below, we have written up the advantages
and the differences between taking out a loan from a traditional financial
institution and borrowing from a crowdfunding platform. But we’d caution you
against thinking one type of loan is better than the other. There is no “best”
loan option – only a loan that is best for you and your credit
needs.

 

Traditional Financial Institutions

When we talk about traditional financial
institutions, we are usually talking about the banking system. Indeed, in this
section, we will mainly talk about the advantages and disadvantages of bank
loans.

Banks tend to offer long-term,
high-amount loans. If your SME is in the process of scaling up and you need a
vast sum for growth and expansion, you might need more than what a crowdfunding
platform can offer. You should look at the maximum loan amount you can request
from both banks and crowdfunding platforms.

Bank loans come in two forms: secured
and unsecured. In a secured loan, you need to provide valuable assets, such as
house or land, as collateral. Banks use collateral as assets they can seize if
one day you are found unable to pay back your bank obligations. Unsecured bank
loans require no collateral, but they are often reserved for those with
pristine credit ratings.

One of the disadvantages of applying for
a bank loan is the long, drawn-out process. Depending on amount, banks can take
more than a few weeks to process a loan application and disburse funds. Some
people find that having a solid history with the lending bank and having good
assets to offer as collateral can ease the process, but going through a lengthy
and dreary process is the norm.

To file a bank loan application, you may
be asked to submit a myriad of documents and financial statements. Depending on
your loan type, you may need to submit all these documents: a business plan, a
personal budget planner, a personal asset statement, proof of business finances
(in the form of up to date financial accounts and statements), cash-flow
forecasts, and even a cost breakdown to show the bank you have correctly
determined how much you need to borrow.

There is an obvious issue: plenty of
SMEs don’t have suitable collateral or complete financial statements. If this
is true of your SME, you may need to look elsewhere to secure credit.

 

Crowdfunding and Peer-to-Peer Lending
Platforms
 

Structurally, a crowdfunding loan or
peer-to-peer loan tends to be smaller and shorter-term. It may be the type of
loan for a small to medium-sized business in need of a cash flow fix or working
capital.

In a crowdfunding or peer-to-peer
lending platform, investors compete with each other to give you money. In this
system, you run the risk (albeit small) of disinterested investors. There are
occasions when a borrower may not get the amount of money he requested because
not enough investors funneled funds into the loan.

A great advantage of crowdfunding
platforms is the quick and easy process, usually entirely online. Crowdfunding
and peer-to-peer lending platforms often promise several days between
application and disbursement.

Requirement for documents varies for
each loan applicant. Sometimes a platform will ask for more, sometimes for
less. Generally, crowdfunding platforms are more flexible in the assessment
criteria, looking at more than just the hard data in financial statements.
Crowdfunding platforms also look at an applicant’s new projects, staff morale,
director’s background, and the economic situation.

Crowdfunding loans are unsecured, which
helps younger companies as they tend not to have suitable assets for collateral
but most reputable crowdfunding and peer-to-peer lending platforms still ask
for a personal guarantee.

***

There is no neat conclusion to be made
from the comparison above. It all depends on you and your needs. If you can’t
fathom not interacting with a teller in a physical setting, or if your credit
needs are big and long-term, it’s very likely you need to go through a bank.
But if you are a growing company in need of funds to sustain the growth
trajectory of your business, or a mature business in need of access to quick
capital to secure that next big project, it’s better to go through a
crowdfunding platform.