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

  • Reabetswe Kgoroeadira
  • Andrew Burke
  • André van Stel
Article

Abstract

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 www.prosper.com 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.

Keywords

Crowdfunding Peer-to-peer lending Small business finance 

JEL classification

G10 G23 

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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

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