Microfinance and crowdfunding, or peer to peer lending models, have developed in the same financial space and time, but have remained, except for a few notable exceptions, exclusive. How can they work together to provide another path for seed-funding income-generating enterprises?
The majority of peer to peer lending platforms in the developing world at this time are donation based; there are both equity-based and real estate models but they are constrained by significant regulatory burden. Regulatory issues across national systems, fraud prevention, and money-laundering prevention remain challenges to the growth and sustainability of these crowdfunding systems.
The older model of community or neighbourhood savings, common in the developing world, is one that combines some elements of microfinance with crowdfunding. Most donation based crowdfunding platforms work with community financial groups or require some country or region-based oversight to qualify for the system. Microfinance institutions can provide that in-country oversight and can also provide access to financial inclusion, such as identity measures, opening bank accounts, starting savings programs, developing insurance products, and other traditional banking.
But the crowdfunding model has several significant drawbacks to being considered a viable and sustainable model for seed-funding income generating ventures. For donation-based funding that does not have to be paid back, the benefits of developing credit that accrue with microfinance are missing. In addition, financial planning for a small business enterprise can be affected by a platform that relies on donations of an unknown amount. Developing and maintaining a financial relationship with a microfinance organization over time and through a number of financial goals and transactions is a benefit that is quite valuable, but not measured in traditional ways.
One role for donation-based crowdfunding for seeding a small startup is in capital expenses for a new business. Farm or agriculture equipment like trucks or tractors; initial manufacturing equipment costs, land or building purchases can all require more funding than is reasonable for a new borrower through a microfinance agency. But careful documentation of how the borrower managed startup funding through a crowdfunding agency can work toward credit and help establish a business. Microfinance can then assume the larger and more traditional financial role in the life of a business.
But the most significant challenge to the role of crowdfunding small business startups is the issue of regulatory models. There are a number of diverse platforms that provide opportunities that may face regulatory challenges in the developing world. As the systems mature and begin to transition from donation-based to various equity models, both regulatory challenges and issues of fraud and abuse will have to be addressed in order for the peer to peer funding system to develop true sustainability.
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