Small Business Economics

, Volume 52, Issue 1, pp 67–87 | Cite as

Small business online loan crowdfunding: who gets funded and what determines the rate of interest?

  • Reabetswe Kgoroeadira
  • Andrew BurkeEmail author
  • André van Stel


The advent of online peer-to-peer crowdfunding presents a new type and source of finance for small firms. This raises the question of whether this innovation makes any difference to the type of business that can secure funding and the amount that they pay for this finance. In this paper, we examine the American online peer-to-peer loan crowdfunding website to answer these questions. We create and analyse a dataset of 14,537 small firm unsecured loan applications. We find that lenders in this market ignore business characteristics and focus on personal characteristics instead, particularly a person’s credit score but also whether they are employed and provide a picture. This implies that entrepreneurs who want to raise finance in this market will need to use a very different pitch than the norm in the offline market—as personal rather than firm characteristics are the main determinants of securing funding and the price paid for it.


Crowdfunding Peer-to-peer lending Small business finance 

JEL classification

G10 G23 


  1. Agrawal, A., Catalini, C., & Goldfarb, A. (2011). The geography of crowdfunding, NBER Working Paper No. 16820, Cambridge, MA: National Bureau of Economic Research.Google Scholar
  2. Antoniades, A. (2016). Liquidity risk and the credit crunch of 2007–2008: evidence from micro-level data on mortgage loan applications. Journal of Financial and Quantitative Analysis, 51(6), 1795–1822.Google Scholar
  3. Avery, R., Bostic, R., & Samolyk, K. (1998). The role of personal wealth in small business financing. Journal of Banking and Finance, 22, 1019–1061.Google Scholar
  4. Bates, T. (1991). Commercial bank financing of white and black owned small business start-ups. Quarterly Review of Economics and Business, 31(1), 64–80.Google Scholar
  5. Belleflamme, P., Lambert, T., & Schwienbacher, A. (2014). Crowdfunding: tapping the right crowd. Journal of Business Venturing, 29(5), 585–609.Google Scholar
  6. Berger, A. N., & Frame, W. S. (2007). Small business credit scoring and credit availability. Journal of Small Business Management, 45(1), 5–22.Google Scholar
  7. Berger, A., & Udell, G. (1995). Relationship lending and lines of credit in small firm finance. Journal of Business, 68, 351–381.Google Scholar
  8. Berger, A., Cowan, A., & Frame, S. (2011). The surprising use of credit scoring in small business lending by community banks and the attendant effects of credit availability, risk and profitability. Journal of Financial Services Research, 39, 1–17.Google Scholar
  9. Besanko, D., & Thakor, A. (1987). Collateral and rationing: sorting equilibria in monopolistic and competitive credit markets. International Economic Review, 28(3), 671–689.Google Scholar
  10. Bester, H. (1985). Screening vs. rationing in credit markets with imperfect information. The American Economic Review, 75(4), 850–855.Google Scholar
  11. Bester, H. (1987). The role of collateral in credit markets with imperfect information. The European Economic Review, 31, 887–899.Google Scholar
  12. Bhide, A. V. (2000). The origin and evolution of new businesses. New York: Oxford University Press.Google Scholar
  13. Binks, M., & Ennew, C. (1998). Private Businesses and their Banks, Forum of Private Business Bank Survey, 1998, University of Nottingham Business School.Google Scholar
  14. Block, J., Hornuf, L., & Moritz, A. (2017). Which updates during an equity crowdfunding campaign increase crowd participation?. Small Business Economics. First Online: 24 May 2017.Google Scholar
  15. Boot, A., & Thakor, A. (1994). Moral hazard and secured lending in an infinitely repeated credit market game. International Economic Review, 35(11), 899–920.Google Scholar
  16. Bruton, G., Khavul, S., Siegel, D., & Wright, M. (2015). New financial alternatives in seeding entrepreneurship: microfinance, crowdfunding and peer-to-peer innovations. Entrepreneurship Theory and Practice, 39(1), 9–26.Google Scholar
  17. Burke, A., & Hanley, A. (2003). How do firms pick safer ventures? A theory relating the importance of risk aversion and collateral to interest rates and credit rationing. Journal of Entrepreneurial Finance and Business Ventures, 8(2), 13–24.Google Scholar
  18. Burke, A., & Hanley, A. (2006). Bank interest margins and business start-up collateral: testing for convexity. Scottish Journal of Political Economy, 53(3), 319–334.Google Scholar
  19. Burke, A., Fraser, S., & Greene, F. J. (2010). The multiple effects of business planning on new venture performance. Journal of Management Studies, 47(3), 391–415.Google Scholar
  20. Chan, Y. S., & Thakor, A. V. (1987). Collateral and competitive equilibria with moral hazard and private information. The Journal of Finance, 42(2), 345–363.Google Scholar
  21. Cole, R. (1998). The importance of relationships to the availability of credit. Journal of Banking and Finance, 22, 959–997.Google Scholar
  22. Coleman, S. (2000). Access to capital and terms of credit: a comparison of men and women owned small businesses. Journal of Small Business Management, 20(3), 37–52.Google Scholar
  23. Cowling, M. (1999). The determination of bank-small business loan premia in the UK. Applied Economics Letters, 65, 251–253.Google Scholar
  24. Cowling, M., Matthews, C., & Liu, W. (2017). The role of loan commitment terms in credit allocation on the UK small firms loan guarantee scheme. International Review of Entrepreneurship, 15(1), 15–28.Google Scholar
  25. Cressy, R. (1996). Commitment lending under asymmetric information: theory and tests on UK start-up data. Small Business Economics, 8(5), 397–408.Google Scholar
  26. Cressy, R., & Toivanen, O. (2001). Is there adverse selection in the credit market? Venture Capital, 3(3), 215–238.Google Scholar
  27. Diamond, D. (1989). Reputation acquisition in debt markets. Journal of Political Economy, 97(4), 828–862.Google Scholar
  28. Dunne, T., Roberts, M. J., & Samuelson, L. (1989). The growth and failure of US manufacturing plants. The Quarterly Journal of Economics, 104(4), 671–698.Google Scholar
  29. Good, W., & Graves, R. (1993). Small business support programs: the views of failed versus surviving firms. Journal of Small Business and Entrepreneurship, 10, 66–76.Google Scholar
  30. Granovetter, M. S. (1973). The strength of weak ties. American Journal of Sociology, 78(6), 1360–1380.Google Scholar
  31. Han, L., & Greene, F. (2007). The determinants of online loan applications for small businesses. Journal of Small Business and Enterprise Development, 14(3), 478–486.Google Scholar
  32. Hanley, A., & Girma, S. (2006). New ventures and their credit terms. Small Business Economics, 26, 351–364.Google Scholar
  33. Harhoff, D., & Körting, T. (1998). Lending relationships in Germany: empirical results from survey data. Journal of Banking and Finance, 22, 1317–1354.Google Scholar
  34. Hartley, S (2010), Crowd–sourced microfinance and cooperation in group lending, SSRN Working Paper, Social Science Research Network, available as
  35. Honjo, Y. (2000). Business failure of new firms: an empirical analysis using multiplicative hazard model. Journal of Industrial Economics, 18, 557–574.Google Scholar
  36. Jimenez, G., Salas, V., & Saurina, J. (2006). Determinants of collateral. Journal of Financial Economics, 81(2), 255–281.Google Scholar
  37. Kaartemo, V. (2017). The elements of a successful crowdfunding campaign: a systematic literature review of crowdfunding performance. International Review of Entrepreneurship, 15(3), 291–318.Google Scholar
  38. Keasey, K., & Watson, R. (2000). Interest rate premia on UK small firm bank borrowing: a research note. Journal of Business Finance & Accounting, 27, 247–259.Google Scholar
  39. Klafft, M. (2008). “Online peer-to-peer lending: a lenders’ perspective” (July 14, 2008). In H. R. Arabnia & A. Bahrami (Eds.), Proceedings of the International Conference on E-Learning, E-Business, Enterprise Information Systems, & E-Government, EEE 2008 (pp. 371–375), Las Vegas: CSREA Press. Available at SSRN:
  40. Lin, M., & Viswanathan, S. (2016). Home bias in online investments: an empirical study of an online crowdfunding market. Management Science, 62(5), 1393–1414.Google Scholar
  41. Lin, M., Prabhala, N. R., & Viswanathan, S. (2013). Judging borrowers by the company they keep: friendship networks and information asymmetry in online peer-to-peer lending. Management Science, 59(1), 17–35.Google Scholar
  42. Mach, T, Carter, C., & Slattery, C (2014). Peer-to-peer lending to small businesses finance, Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, DC, Working Paper No. 2014–10. Available at SSRN: or
  43. Machauer, A., & Weber, M. (1998). Bank behavior based on internal credit ratings of borrowers. Journal of Banking & Finance, 22(10), 1355–1383.Google Scholar
  44. Macht, S. A., & Weatherston, J. (2014). The benefits of online crowdfunding for fund-seeking business ventures. Strategic Change, 23(1–2), 1–14.Google Scholar
  45. Mollick, R. (2013). Swept away by the crowd? Crowdfunding, venture capital, and the selection of entrepreneurs, SSRN working paper, available at SSRN: or
  46. Mollick, E. (2014). The dynamics of crowdfunding: an exploratory study. Journal of Business Venturing, 29, 1–16.Google Scholar
  47. Moritz, A., & Block, J. H. (2016). Crowdfunding: a literature review and research directions. In D. Brüntje & O. Gajda (Eds.), Crowdfunding in Europe (pp. 25–53). New York: Springer.Google Scholar
  48. Parker, S. C. (2009). The economics of entrepreneurship. Cambridge: Cambridge University Press.Google Scholar
  49. Petersen, M., & Rajan, R. (1994). The benefits of lending relationships: evidence from small business data. Journal of Finance, 49, 3–37.Google Scholar
  50. Petersen, M., & Rajan, A. (1995). The effect of credit market competition on lending relationships. Quarterly Journal of Economics, 110(2), 407–443.Google Scholar
  51. Piva, E., & Rossi-Lamastra, C. (2017). Human capital signals and entrepreneurs’ success in equity crowdfunding. Small Business Economics, forthcoming. First Online: 20 November 2017.Google Scholar
  52. Schwienbacher, A., & Larralde, B. (2012). Crowdfunding of entrepreneurial ventures. In D. Cumming (Ed.), The Oxford Handbook of Entrepreneurial Finance. Oxford: Oxford University Press.Google Scholar
  53. Sharpe, S. (1990). Asymmetric information, bank lending and implicit contracts: a stylised model of customer relationships. Journal of Finance, 45, 1069–1087.Google Scholar
  54. Short, J. C., Ketchen, D. J., McKenny, A. F., Allison, T. H., & Ireland, R. D. (2017). Research on crowdfunding: reviewing the (very recent) past and celebrating the present. Entrepreneurship Theory and Practice, 41(2), 149–160.Google Scholar
  55. Simmons, S. A., Wiklund, J., & Levie, J. (2014). Stigma and business failure: implications for entrepreneurs’ career choices. Small Business Economics, 42(3), 485–505.Google Scholar
  56. Stiglitz, J., & Weiss, A. (1981). Credit rationing in markets with imperfect information. American Economic Review, 71, 393–410.Google Scholar
  57. Storey, D. J. (1994). Understanding the small business sector. London: Routledge.Google Scholar
  58. Stuart, T. E., Hoang, H., & Hybels, R. C. (1999). Interorganizational endorsements and the performance of entrepreneurial ventures. Administrative Science Quarterly, 44(2), 315–349.Google Scholar
  59. Ucbasaran, D., Shepherd, D. A., Lockett, A., & Lyon, S. J. (2013). Life after business failure: the process and consequences of business failure for entrepreneurs. Journal of Management, 39(1), 163–202.Google Scholar
  60. Van der Zwan, P. (2016). Bank loan application success of innovative and non-innovative SMEs. International Review of Entrepreneurship, 14(4), 483–502.Google Scholar
  61. Vismara, S. (2016). Equity retention and social network theory in equity crowdfunding. Small Business Economics, 46(4), 579–590.Google Scholar
  62. Zhang, J., & Liu, P. (2012). Rational herding in microloan markets. Management Science, 58(5), 892–912.Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Beryl HoldingsSandtonSouth Africa
  2. 2.Trinity Business School, Trinity College DublinUniversity of DublinDublin 2Ireland
  3. 3.Kozminski UniversityWarsawPoland

Personalised recommendations