How P2P Crowdfunding Is Disrupting Wall Street

One of the biggest complaints that plagues the investment world relates to how to best pair eager investors with financially needy entrepreneurs.

This is especially the case for novice investors and fledgling entrepreneurs who often have few to no avenues that bring them together. These groups are often loss in the shuffle because their small sizes don’t put them on the radar screens of investment bankers.

In this piece, we’ll address how online services are disrupting the finance industry and helping entrepreneurs raise capital from everyday investors.

Fret No More

Recognizing the growing need to bring entrepreneurs together with individual investors, several players have launched online services. Some of these services involve peer-to-peer lending (P2P) and crowdfunding. They are increasingly being tapped by investors seeking alternatives to Wall Street and its investment bankers.

A major hurdle many entrepreneurs face is securing financing. Many of them fall into the high-risk borrower category because they haven’t generated revenue or profits from their businesses. With no sure-fire proof that they can repay a loan, banks often frown upon them. If they are offered a loan, it usually comes with steep interest rates.

P2P lending can alleviate this hurdle. Take the Lending Club, for example. Its P2P platform brings together borrowers looking for rates lower than those offered by banks and investors looking for attractive returns. Another plus for the Lending Club are the typically strong net returns that it offers high-risk borrowers.

P2P Crowdfunding Wall St

When the Crowd Disrupts Wall Street

While P2P lending brings borrowers together with investors, so does crowdfunding.

You’ve likely heard of crowdfunding campaigns like Kickstarter and Indiegogo. Often, those who contribute to these campaigns are thanked with a coffee mug or t-shirt.

A relatively new law has significantly upped the ante for investors and entrepreneurs. Passed in 2012, the Jumpstart Our Business Startups Act (JOBS Act) is leveling the playing field for investors and entrepreneurs.

Instead of a mundane mug, or T-shirt, consumers who invest in startups receive equity in the business. Businesses in just about every sector are flocking to the JOBS Act’s provisions in their capital raising efforts.

There is one sector that novice investors should avoid. That is real estate. While it is growing in popularity for the hefty returns that investors receive, its risks and complexities can mitigate the gains.

Novice investors should avoid real estate crowdfunding platforms that focus on single family home flips, for example. If you can stomach the inherent risks of real estate investment, go with platforms like RealtyShares that fund larger commercial projects. But, stay away from lower-quality deals, which experts warn against because they are generally riskier.

Getting Started

Many see investing as being only for the wealthy. Even more don’t have the money to spare to invest.

Recognizing this challenge, services are cropping up that allow the less wealthy to build up their spare change and use it for investing once they’ve saved enough. And for those tech savvy, and heavy tech users in the millennial generation, there is an app for that.

One of those apps that we took a look at is called Acorns. We like that it rounds up your transactions to the nearest dollar, and then puts those dollars into the account of the user’s choice. Taking out the leg work is a plus for those wanting to easily build up their savings to allow for future investments.

Investing does not mean being rich, or having easy access to Wall Street bankers. Entrepreneurs and consumers can come together through a myriad of online service that are eliminating the middle-man, also known as the banker.