5 Differences Between Funding and Lending You Need to Know
5 Differences Between Funding and Lending You Need to Know
Business and technological innovations are expanding in Indonesia. For example, fintech and lending services. There's considerable interest, leading a large portion of the Indonesian population to start using both services. However, it's essential for the public to understand that there are differences between funding and lending.
Several digital platforms can facilitate both services, such as those provided by P2P lending fintech. To understand these differences clearly, Brick provides detailed information from definitions to distinctions between funding and lending.
Definition of Fintech Funding and Lending
In general, funding involves collecting and distributing funds to individuals or institutions for specific purposes. Meanwhile, lending entails distributing funds to borrowers, whether individuals or institutions. To bridge funding and lending, there are lenders, also called borrowers, and fund borrowers, also called lenders.
To support all funding and lending activities, several types of technology and features can be utilized, including:
1. P2P Lending
This service works by distributing funds from lenders to borrowers. All processes are connected through an application service. This service is regulated by the Financial Services Authority Regulation No. 77/POJK.01/2016. This regulatory permission serves as legal basis for operating and serving borrowers and lenders.
2. Crowdfunding
This fundraising service is usually for social activities. This model can be used by communities to raise and distribute funds back to the public for free. To obtain strong legal grounds, organizers need permission from the Ministry of Social Affairs and the Ministry of Communication and Informatics.
3. Paylater
This is a derivative of fintech lending. However, there's a difference from P2P lending. Paylater provides financing to individuals when making non-cash purchases. Some fintech companies using this model usually provide a tool called a virtual credit card. Similar to P2P lending, paylater has legal umbrella from Financial Services Authority Regulation.
4. Equity or Securities Crowdfunding
This service is regulated by Financial Services Authority Regulation No. 16/POJK.04/2021. It can help SMEs and companies raise capital by selling shares to third parties. People can participate and then receive rewards in the form of a percentage of shares.
Differences Between Funding and Lending
Funding:
- Customer: Personal, Institutional
- Platform: P2P Lending, Crowdfunding, Securities Crowdfunding
- Activity: Providing Funds
- Advantages: Interest, Equity Ownership
- Risks: Non-performing Loans, Company Bankruptcy
Lending:
- Customer: Personal, Institutional
- Platform: P2P Lending, Crowdfunding, Paylater, Securities Crowdfunding
- Activity: Lending Funds
- Advantages: Fast Loans, Business Capital
- Risks: Late Fees
In addition to these five points, there are also differences based on user experience and registration processes.
First, in user experience, the applications between the two differ. Additionally, in the registration process, funders are given the opportunity to choose preferences regarding fund allocation. Meanwhile, fund borrowers are more inclined towards creditworthiness assessment.
Second, funders are given options on which activities to fund. Meanwhile, fund borrowers are given options based on the loan amount and tenure.
Open Finance in Funding and Lending
There are several features in Open Finance that can be utilized by both funding and lending:
1. Verification
Helps platforms verify the identities of potential lenders and borrowers. Identity verification is important as a preventive measure to minimize risks such as fraud. This system, also known as E-KYC, works quickly and can provide accurate responses to regulators.
2. Credit Scoring
This platform assesses the creditworthiness of borrowers to determine if they can repay funds according to agreements. The data will be processed and provided to relevant parties to make decisions. Credit scoring platforms have legal certainty from the Financial Services Authority.
3. Aggregation
This platform can link various financial accounts to the fintech platform used. Lenders can integrate bank account information into fund distribution applications to provide funds.
After understanding the explanations above, you have received comprehensive information about the differences between funding and lending.
