Introduction
Global finance constantly evolves, and new technologies are emerging to make it easier, faster, and more accessible. Two of the most widely discussed topics in modern finance are microlending and crowdfunding, enabling people to access capital and financial services in unimaginable ways. Therefore, this essay will explore the definitions of microlending and crowdfunding, their pros and cons, the popularity of these topics, and their future use.
Microlending
Definition
Microlending can be defined as providing small loans to individuals or businesses who need help accessing traditional banking services due to their inadequate creditworthiness or collateral. The loans are typically given in small amounts and are repaid over a short period. Microlending is commonly utilized to assist entrepreneurs in emerging economies who need more access to capital to secure traditional loans (Heßler et al., 2022).
A well-known example of microlending is Kiva, a non-profit organization providing loans to needy entrepreneurs. Kiva is a website where anyone can lend money to small- and medium-sized companies in impoverished countries. Individuals can borrow as little as $25 to lenders in over eighty countries across the world through Kiva (Schwittay, 2019).
Kiva’s mission is to enable people to connect with and lend money to others in need on their terms, regardless of their geographic location or financial means (Schwittay, 2019). Kiva partners with several microfinance institutions responsible for reviewing loan applications, approving loans, and disbursing funds. Once the loan is repaid, Kiva lenders can withdraw their funds or reinvest the money in another loan.
Pros and Cons
One of the benefits of microlending is that it provides access to capital and financial services to those who would otherwise not be able to obtain them. That can significantly impact individuals and businesses in developing countries, as it can enable them to pursue opportunities that they would not have otherwise been able to (Heßler et al., 2022). Additionally, microlending can increase financial literacy and business acumen, as borrowers must understand and manage their finances to repay their loans (Heßler et al., 2022). On the contrary, there are some potential drawbacks to microlending, such as the interest rates charged on microloans being higher than those of traditional loans, hence burdening borrowers. Moreover, microlending can be risky for lenders, as borrowers may need help to repay their loans.
Popularity
In recent years, microlending has gained significant traction, especially in developing nations. According to research, the total number of microloans issued in 2017 was around 1.7 billion, marking a 40% rise compared to the previous year (Heßler et al., 2022). Furthermore, the number of microfinance institutions has expanded considerably, with more than 7,000 entities operating across over 100 nations (Heßler et al., 2022). The increased popularity of microlending is due to its potential to reduce poverty and inequality, promote economic development, and empower individuals who may not have access to other forms of financing.
Microloans are often targeted toward women, who are often the most vulnerable to poverty and inequality. By providing the opportunity to access capital, microloans can help women start businesses and become financially independent. Furthermore, microfinance institutions often offer other services, such as financial literacy training and business advice, which can help borrowers become more successful.
Future Use
Microlending is expected to grow in popularity in the coming years, particularly in developing countries. According to a recently published report, microlending is anticipated to grow by 20% over the next five years (Shepard, 2019). Furthermore, it is projected to become the third most common form of credit issued, falling behind mortgages and car loans (Shepard, 2019). Therefore, the growth of microlending is likely to continue as more people become aware of its benefits and as more lenders become available.
Crowdfunding
Definition
Crowdfunding is a form of fund collection that involves raising money from several people, usually through the Internet. Entrepreneurs and businesses often use it to fund their projects or products, ranging from small projects to large-scale operations.
A well-known example of crowdfunding is Kickstarter, an online platform allowing entrepreneurs to raise money for their projects (U.S. Department of Commerce, 2020). Users create a project page that describes their project, sets a funding goal, and then invites people to contribute money. If the project reaches its goal, the money is released to the creator; if it does not, the funds are returned to the donors, and Kickstarter takes a 5% fee from all funds raised (U.S. Department of Commerce, 2020). Kickstarter is widely considered to be a leader in the crowdfunding space and has helped to launch thousands of successful projects.
Pros and Cons
One of the significant benefits of crowdfunding is that it enables entrepreneurs and businesses to access capital that would otherwise be unavailable to them. Crowdfunding can also provide entrepreneurs and businesses with valuable feedback and insights from potential customers, which can be used to refine their projects and products (U.S. Department of Commerce, 2020). Nevertheless, there are some potential drawbacks to crowdfunding; for example, standing out in a crowded marketplace can be challenging, as many projects compete for the same funding. Additionally, ensuring that projects are completed as promised can be challenging, as there is often no legal recourse if the project fails to meet its goals.
Popularity
Crowdfunding has become increasingly popular recently, particularly among entrepreneurs and startups. The total amount of crowdfunding raised in 2017 was approximately $34 billion, representing a 23% increase from the previous year (U.S. Department of Commerce, 2020). Furthermore, crowdfunding platforms have grown significantly, with over 1,400 operating in more than 100 countries (U.S. Department of Commerce, 2020).
Therefore, through crowdfunding, entrepreneurs can pitch their ideas to a wide range of potential investors and customers, providing them with an opportunity to gain the funding they need to get their business off the ground. Additionally, crowdfunding can be a great way to build a community of supporters who are invested in the project’s success. With the help of those supporters, entrepreneurs and startups can more easily reach their goals.
Future Use
Crowdfunding is expected to become even more popular in the future years, particularly among entrepreneurs and startups. According to a recent U.S. Department of Commerce report, crowdfunding is anticipated to grow 40% over the next five years (2020). That is due to the increasing reputation of crowdfunding and the growing number of platforms and options available to entrepreneurs and startups.
Moreover, it is anticipated to become the second most prevalent financial model, falling behind venture capital. That is a testament to the growing acceptance of crowdfunding as a viable source of finance. As more entrepreneurs and startups turn to crowdfunding, the industry will likely continue to grow in the coming years.
Conclusion
Microlending and crowdfunding are two of the most prominent contemporary finance topics. They have enabled individuals and enterprises to obtain capital and financial resources in previously unimaginable ways. Microlending is often used to support entrepreneurs in developing countries, while entrepreneurs and businesses use crowdfunding to fund their projects or products. Both topics have pros and cons and have become increasingly popular in recent years. Additionally, both topics are predicted to gain increasing popularity in the future.
References
Heßler, P. O., Pfeiffer, J., & Hafenbrädl, S. (2022). When self-humanization leads to algorithm aversion: what users want from decision support systems on prosocial microlending platforms. Business & Information Systems Engineering, 64(3), 275-292. Web.
Schwittay, A. (2019). Digital mediations of everyday humanitarianism: the case of Kiva. org. Third World Quarterly, 40(10), 1921-1938. Web.
Shepard, J. M. (2019). Microlending and non-accredited RE investors as a current trend. Global Journal of Management and Business Research, 19(F1), 1-6. Web.
U.S. Department of Commerce. (2020). Division of banking and securities. Crowdfunding Resources. Web.
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