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Micro-Entrepreneurs’ perspectives towards Micro Funding: Crowd funding, Peer-to-Peer lending and Micro-Financing

Table of Contents

CHAPTER 2: LITERATURE REVIEW… 2

Purpose statement 2

Documentation. 3

BACKGROUND INFROMATION.. 4

Benefits of Micro-Funding. 4

Risks of Micro-Funding. 7

HISTORICAL PERSPECTIVES. 8

History of peer-to-peer lending. 8

History of micro-financing. 13

History of crowd funding. 14

THEORETICAL FRAMEWORK.. 19

The Disruptive Technology Theory. 19

POPULAR MODELS OF MICRO-FUNDING.. 21

Microfinance models. 22

Peer to peer lending model 22

Crowd funding models. 24

PERSPECTIVES ON MICRO-FUNDING.. 25

Perspectives on Micro-Finance. 25

Perspectives on Peer to Peer Lending. 31

Perspectives on Crowd funding. 34

PROBLEMS FACED BY MICRO-ENTREPRENEURS. 35

SUMMARY.. 37

CONCLUSION.. 40

REFERENCES. 40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHAPTER 2: LITERATURE REVIEW

Purpose statement

The purpose of this literature review section is to provide comprehensive information on the research available on the matter of micro-entrepreneurs’ perspectives towards micro-funding, and particularly, crowd funding, peer to peer lending and micro-financing. This research topic is important because it provides insight into the utilization of these micro-funding options by small and medium-sized business owners. Micro-funding has been a major part of the contemporary business society for a considerably long time now (Rabby et al., 2011). There has been extensive research into the concept as well as its concepts of, crowd funding, peer to peer lending and micro-financing. However, little research has been done concerning the actual perspectives of small and medium-sized business owners regarding micro funding. While it may be naturally presumed that these micro-entrepreneurs are wholly receptive towards the micro-funding options, this may not be the case for variable reasons. For instance, there may be micro-entrepreneurs who are unaware of the details of micro-funding and how it can be utilized effectively to help them in enhancing their business options and to avoid such undesirable realities of business like bankruptcy among others (Beugré, & Das, 2013). There may also be micro-entrepreneurs who are strongly opposed to the idea of micro-funding for different reasons.

All in all, this literature review section will provide sufficient information in relation to the research that has already been conducted by other credible researchers on the same topics so as to acquire a detailed overview of the situation related to micro-funding options and small and medium-sized business owners. Essentially, it provides comprehensive and generalized information based on the research and findings of others. Importantly, the information acquired from the literature review will be useful in helping to guide the direction of this particular research study.

Documentation

The literature search strategy for this literature review section is primarily based on online searches. There are certain keywords that will be used in order to acquire the most relevant research search results. These encompass: micro-entrepreneurs, micro-funding, perspectives, micro-financing, crowd funding, and peer to peer lending. The online databases that will be used include online libraries such as Griffith and Google Scholar. Moreover, Google Books will also be utilized for the purpose of this literature review section. The main purpose of using these sources is so as to acquire mostly peer reviewed materials as well as credible sources (Kessy, & Temu, 2010). Importantly, most of the research material selected will not be more than 5 years old. Additionally, the authors of these articles and books must be credible sources in terms of educational qualifications or professional qualifications. In addition, I will also use some material from hardcopy books and articles that prove to be relevant and appropriate to contribute to this research study.

BACKGROUND INFROMATION

It is imperative to have sufficient knowledge of these concepts so as to comprehend how small and medium-sized business owners perceive them as well. Micro-funding comprises three concepts: crowd funding, peer to peer lending and micro-financing. Microfinance is defined as: “The provision of a broad range of financial services” (Osotimehin et al., 2012).  Services such as products to the poor and low-income households for their microenterprises and small businesses to have the ability to raise their income levels and improve their living standards” (Burkett, 2011). Alternatively, crowd-funding describes the usage of small amounts of funds acquired from a massive number of organizations or people for the purpose of financing a project, personal loan, or a business among other needs that a person may have via the online platform (Stein, Ardic, & Hommes, 2013). Lastly, peer-to-peer lending denotes the financial transactions for profit that occur between peers or individuals who have no intermediation of a conventional financial institution (Sørensen, 2012).

Benefits of Micro-Funding

Micro-funding is widely acclaimed for having certain benefits that serve to the advantage of small and medium-sized business owners and the economy at large. Firstly, micro-funding institutions enhance economic growth and development via new and advancing credit flows to small and medium-sized enterprises as well as other users in the actual economy. Through micro-funding, credit is availed to the real economy (Heller, & Badding, 2012). This benefit is largely acknowledged by various governments whose aim it is to enable further growth in small and medium-sized enterprises. It is common business knowledge that small and medium-sized businesses are an essential propeller of economic growth. Therefore, any mechanism that aids these enterprises to acquire capital for expansion and development purposes more efficiently helps in economic recovery and job creation.

Secondly, micro-funding solutions fill the gap that has been left by banks. Traditional lenders have more stringent restrictions on the basis of capital requirements. Subsequently, this has reduced the desire of banks to offer uncollateralized credit for any types of loans. Particularly, small and medium-sized businesses are highly affected by this. Micro-funding provides a formidable substitute to conventional lending. Such options as crowd-funding and peer to peer lending currently provides financial services to this niche market.

Another benefit of micro-funding solutions is reduced cost of capital and subsequent high returns. Micro-funding provides an alternative of low cost for a lender to drive one’s savings into the real economy. Moreover, the rates that are imposed via micro-funding options serve to benefit small and medium-sized business owners since there are lower interests involved than in traditional financial institutions. This is an era of minimal capital for the borrowers in need and low returns for lenders. Therefore, micro-funding is a suitable alternative.

In addition, micro-funding offers a new product for the diversification of portfolio (Heller, & Badding, 2012). For instance, peer to peer lending online platforms provide lenders with a new product which is uncollateralized debt. As a result, investors are able to enhance diversification of their portfolios. Notably, the diversification of assets often reduces the magnitude of systemic risk as well as minimizes the overdependence of lenders on only one asset. It is notable that in peer to peer lending and crowd funding, the amount of money that a single investor should channel into a product is reduced since many investors are brought in to provide smaller amounts and create a pool of funds for borrowers.

Cost efficiency is another benefit, particularly concerning the use of the online platform as in crowd funding and peer to peer lending (Berg, & Kirschenmann, 2012). Essentially, unlike traditional financial institutions like banks, online platforms have a virtually non-existent need for a physical presence in a particular location. Moreover, there is also the streamlined cost of utilizing algorithms to establish an applicant’s credit worthiness. Altogether, the platforms operate with a comparatively reduced cost of infrastructure. Therefore, online platforms are more cost efficient than conventional lending methods where manpower and an actual physical presence is mandatory for effective operation. Importantly, lower overhead minimizes the cost of the loan for borrowers as well as increases the rate of return for investors due to reduced administrative costs.

Convenience is another factor of benefit with regards to micro-funding, and particularly peer to peer lending and crowd funding. Essentially, an online platform is more accessible to users who are enabled to manage their portfolios easily. Importantly also, online platforms are available at all times of the day regardless of whether there is a holiday or not as opposed to traditional financial institutions where opening and closing hours are restricted. In addition, as a result of using the online platform, peer to peer ending and crowd funding have increased flexibility for updating operations. There are not many peer to peer lending and crowd funding platforms that operate globally. However, the online business model enables ease and convenience for their expansion.

Lastly, one more benefit of micro-funding is that in enhances competition in the financial sector that was originally dominated by very few service providers (Berg, & Kirschenmann, 2012). The factor of increased competition is beneficial to lenders, borrowers and the larger economy. The reason for this is that the costs are reduced and value is established. Additionally, the existence of micro-funding options develops the incentive for conventional entities to innovate, increase efficiency and reduce costs.

Risks of Micro-Funding

There are certain risks involved in the use of micro-funding solutions. Firstly, there is the risk of default. Default rates are a major factor to consider in micro-funding. High rates of default affect borrowers since lenders are apprehensive to invest at a loss. With particular regard to small and medium-sized businesses owners, many of the individuals who borrow money usually want it for the purpose of starting up new businesses (Johnson, Ashta, & Assadi, 2010). Research indicates that fifty percent of startup businesses are unsuccessful which means that the small and medium-sized business owners are therefore unable to pay back their loans to the various micro-funding channels from which they borrowed. This is a major demotivation factor for investors in micro-funding options.

Moreover, there is the platform risk. This risk is primarily associated with peer to peer lending and crowd funding since they use the online platform. As previously mentioned, unlike traditional financial institutions like banks, peer to peer lending and crowd funding do not require a physical presence (Johnson, Ashta, & Assadi, 2010). Fundamentally, this is even riskier for the parties involved. An online platform can be permanently or temporarily shut down by its administration which may leave both the borrowers and the lenders stranded. While the borrowers may not acquire the money that they need for their small and medium-sized enterprises, the lenders face the risk of losing their entire sum of money dispensed on the platform.

The risk of fraud is paramount in micro-funding. These encompass such factors as: data protection violations, consumer privacy, terrorism financing, money laundering, and identity theft. Virtually all the parties involved may be adversely affected by any of the occurrences mentioned above.

HISTORICAL PERSPECTIVES

1. History of peer-to-peer lending

Peer to peer lending is occasionally categorized as a form of crowd-based financing. The borrower can be a business or an individual. For the purpose of this research paper however, all the borrowers are small and medium-sized business owners who borrow money for the purpose of starting up a business or making advancements to an already existent business that may be struggling. In peer to peer lending, lenders can provide money in small portions of the general loan that a particular borrower requires. The online platform of peer to peer lending serves the purpose of aggregating the loan parts provided by lenders until enough money is amassed to cover the loan required by a borrower. In this case, the online platform originates the loan and gives it to the borrower.

Notably, the online platform for peer to peer lending also sets the interest rate for the loans given to the borrowers. It is notable that the interest rate of peer to peer lending is normally higher than that of savings rates that are availed to the lender. Regardless, they are also lower than the conventional loan interest rate that is offered to a borrower by financial institutions like banks (Davis, & Gelpern, 2010). The interest rate is normally dependent on the evaluated risk of the borrower. The lender receives the interest of the loan until: either the loan matures, the borrower defaults or the borrower is able to pay the loan back before time elapses.

Importantly, there are also small peer to peer lending platforms that commonly serve niche markets. They encompass platforms that have a specified focus in real estate transactions, consumer to consumer loans, technological startups, art project financing, funeral financing, graduate financing, business to business and venture capital among others (Davis, & Gelpern, 2010).

Peer to peer lending is considered to be a decentralized type of money lending whereby individuals make direct loans to the people who are in need of money, in this particular context, small and medium-sized business owners. It is commonly referred to as social lending. peer to peer lending has been in use since utilized since the early sixteenth century when Jonathan Swift, the renowned Irish author of Gulliver’s Travels, began lending small amounts of money to the people in need so that he would be repaid in interest (Bruton et al., 2015). All through the eighteenth and nineteenth centuries, peer to peer lending acquired fame as one of the most predominantly used methods for lending money in Europe. Regardless of the fact that in the twentieth century it came less popular with the growing influence of banks, over the recent past this type of money lending method has resumed its initial popularity as a result of the development of the internet.

Peer to peer lending enables anyone in need of money to borrow from another person. The peer to peer lending platforms in the contemporary society enable borrowers to notify creditors concerning their background and needs by creating an online profile. Importantly, digital peer to peer lending has expanded in the United Kingdom since Zopa was launched in 2005 (Heller, & Badding, 2012). Zopa is an online lending platform that has lent more than 635 million euros to borrowers. It goes down in history as the first peer to peer lending platform to be launched in the United Kingdom.

The year 2008 marked a turning point in the modern history of peer to peer lending as a result of the Lehman Brothers being bankrupt (Yum, Lee, & Chae, 2012). People all over the world began to lose confidence in financial institutions and could not secure credit at a sensible interest level. During this period, peer to peer lending was viewed as an attractive and practical option. Before the global financial crisis of 2007-2008, majority of the people were prone to using banks as a source of money whenever they needed loans (Berg, & Kirschenmann, 2012). The houses that had been utilized as security for particular loans lost most of their value and resultantly, institutional lending became highly inaccessible to most people.

Between 2007 and 2013, peer to per lending in the United Kingdom expanded from a margin operation to an entire industry. The annual turnover that had been estimated as at 2014 was one billion euros. According to an innovation charity in the United Kingdom, Nesta, seventy seven percent of organizations that currently use peer to peer lending are highly likely to use it again in future. In comparison with traditional lending options, peer to peer lending has certain benefits (Ashta, 2010). If provides higher return rates for investors in comparison with a savings account and has more access to finance for people in need of money. Moreover, it is also creditably transparent for all the parties involved.

At present, banks are concerned about the dramatic expansion of peer to peer lending and perceive it as a prospective source of competition. According to a Wells Fargo internal memo, bank employees were banned from participating in peer to peer lending in 2013 for the reason that it was a competitive operation that posed a conflict of interest. Notably however, banking institutions and peer to peer lenders are beginning to see the benefits of establishing partnerships amongst themselves in the contemporary business society of alternate banking. A classic example is Santander, a high-street bank, which partnered with Funding Circle recently (Matofska, 2014).

The Lending Club is found in the United States of America and is considered to be one of the largest peer to peer lending scheme with about eleven billion dollars’ worth of loans given to small and medium-sized business owners. The organization services medical, small business loans and personal finance among others. The range of loan amounts given to borrowers ranges from one thousand dollars or fifteen thousand dollars for businesses up to thirty five thousand dollars or three hundred thousand dollars for businesses (Chandy, & Narasimhan, 2011). This is usually dependent on credit grading of the prospective borrower. Notably, APR varies between five percent and about thirty percent.

Funding Circle, operates in the United Kingdom and the USA primarily on business loan markets for small and medium-sized businesses. To date, the company has provided about one billion dollars’ worth of loans to borrowers with a maximum and minimum amount of five hundred thousand dollars and twenty five thousand dollars for tenures reaching five years.

Upstart I another peer to peer lending platform established in the USA in 2014. It is made strong by its statistical forecasting and modelling of prepayments, delinquencies and repayments. The selection and evaluation of borrowers are founded in FICO scores as well as numerous social and financial factors inclusive of work history, academic performance, area of study and schools attended. An exclusive underwriting model determines the high-quality borrowers regardless of their employment experiences and inadequate credit. Upstart refers to such borrowers as future prime borrowers. The loan offers given by Upstart range from a minimum of three thousand dollars to a maximum of thirty five thousand dollars at an APR starting at 4.7 percent. Since its inception, Upstart has become highly popular among the youth aged between the 20s and 30s who lack a long credit history (Su et al., 2013).

In Australia, the two most predominant peer to peer lending platforms are Ratesetter and SocietyOne. SocietyOne runs a system of borrower grading on the basis of multiple factors. Lenders are able to select their lending portfolio on the basis of borrower gradation, loan purpose, demographics and rate of return among others. SocietyOne differentiates every lender into several borrowers who meet the parameters that the lender has selected. APR rate are variable from five percent to eight percent (Chen, Lai, & Lin, 2014). Alternatively, Ratesetter was launched in 2014. It released loan book data in the country for the purpose of being transparent. It is currently hailed as one of the most successful peer to peer lending platforms in Australia.

Generally, in peer to peer lending, lenders use conventional credit scoring as well as a vast assortment of external parameters for the purpose of evaluating credit worthiness of the borrowers. This encompasses collecting vast amounts of personal and financial data from variable sources inclusive of social media and via different rules of behavioral analysis to be complemented with credit scores to determine risk ratings and prospective APR percentage according to borrower risk profile. The peer to peer lending platforms also allow lender to select and duns certain borrowers, either in part or in full, on the basis of all the parameters like demographic information and ratings (In Tasca, et al., 2016). There are platforms that allow the lender to select indicative borrower profiles and make investments into different portfolios according to the specifications of the lender.

Majority of peer to peer lending platforms have established mechanisms to protect lenders and reduce default rates. These encompass the drawing of legal contract for borrowing, barring offenders from the peer to peer lending platform and from borrowing, recording default and delinquency and exclusively working with specialized collection agencies.

1. History of micro-financing

Microfinance is not a new concept. Credit and savings groups have been in operation for ages including the ‘pasanaku’ in Bolivia, the ‘tontines’ in West Africa, the ‘cheetu’ in Sri Lanka, the ‘arisan’ in Indonesia, the ‘tandas’ in Mexico, the ‘chit funds’ in India and the ‘susus’ of Ghana (Sarumathi, & Mohan, 2011). Forma savings and credit institutions for the poor have also been in existence for several years whereby they provide consumers who had been rejected by the conventional commercial banks a method of obtaining financial services via development finance institutions and cooperatives.

According to Robinson, in the history of microfinance the 1980s were the turning point. During this period, microfinance institutions like Grameen Bank started showing that they were able to offer small savings and loan services on a large scale and profitably so (Hassan, 2010). Thereafter, they received no more subsidizations. Instead, they were funded commercially and were fully sustainable. Moreover, these microfinance institutions were able to acquire a broad outreach to customers. There was a difference between microfinance and the rural credit programs that were subsidized earlier in the century. Firstly, microfinance charged interest rates and stressed on repayments. Essentially, as much as microfinance institutions aimed to help the poor meet their financial needs, they also expected to earn certain profits from their efforts.

In the 1990s, microfinance institutions grew dramatically in terms of numbers. It had been converted into an industry on its own. With the advancement of microcredit institutions, attentions shifted from merely providing credit to poor people to providing other financial services like pension and savings when it was established that there was a market for these services as well among the poor (Sarumathi, & Mohan, 2011).

Today, microfinance is a well-known industry. It serves small and mediums-sized business owners who are incapable of acquiring loans from the more conventional financial institutions like banks. It is projected that the popularity of microfinance institutions will only expand further. Donors and practitioners are progressively focused on the expansion of financial services to the poor in frontier markets as well as on the incorporation of microfinance in the development of the financial system. The former introduction by certain donors of the microfinance financial systems approach has enhanced the general efficiency of microfinance interventions (Sarumathi, & Mohan, 2011). This approach majored on institution building and favorable policy environment. Regardless, there are still several challenges, particularly in agricultural and rural finance as well as other frontier markets. 

At present, the overall microfinance industry as well as the largely development community concur on the perception that longstanding reduction of poverty necessitates that several poverty dimensions are addressed (Hassan, 2010). This indicates that microfinance should be perceived as a necessary component of a nation’s financial system.

• History of crowd funding

Crowd funding denotes the practice of raising capital for a particular venture by acquiring contributions or a large number of individuals. As a result of various online platforms, this practice has become increasingly popular since the access and funding opportunities are comparatively easy and quick.

There is a similarity between peer to peer lending and equity crowd funding on the basis of the online platform used for transactions. It is possible for several people to invest in a business via the online platform and acquire an equity stake (Bannerman, 2015). Normally, the businesses in this context are usually small startups or medium-sized businesses that lack access to other kinds of funding through the public-at-large as a result of their small size and level of immaturity. When the online platform completes raising equity, the crowd investors take equity stakes in the company and take up the associated risks in equity investments. The fact that the borrowers are small and medium-sized business owners increases the risk of such investments. Notably, market intelligence indicates that there is a fifty percent possibility that a startup business will fail within the first five years since conception. In addition, the initial shareholdings in a firm can be weakened in value via additional issuance. Moreover, the lack of a credible secondary market makes these equity stakes illiquid (Bannerman, 2015).

Crowd funding is highly favorable for borrowers, that is, the small and medium-sized business owners. The reason for this is that the lender mostly bears the risk of loss in case the project for which the money was donated fails. For instance, if a particular lender offered money on a crowd funding platform for the purpose of enabling a potential business owner start up a business, in case the startup fails then the lender suffers the loss (Bruton et al., 2015). All in all, micro-entrepreneurs are shifting towards the use of crowd funding for the reason that it allows them to access the funds that they need to meet their business objectives.

Crowd funding is a concept that has been in existence for a couple of years. However, modern crowd funding has been a popular concept since the 1990s as a result of technological advancements (Ibrahim, 2012). Fundable, a renowned crowd funding website, indicates that the concept of modern crowd funding was first used in 1997 when online donations from fans were used to fund the tour of a British rock band. However, crowd funding became very popular in 2009 (De Buysere et al., 2012). From 2009 to 2011, crowd funding increased its revenue from five hundred and thirty million dollars to one and a half billion dollars (Frydrych et al, 2014).

Evidently, the online, project-related funding model is currently highly prevalent. Regardless, it is particularly predominant among charities and small start-up businesses. The reason for this is that it is very informal and has a tendency to move more rapidly than the solicitation of money from investors. Currently, there are hundreds of sites for crowd funding purposes. However, only a handful are renowned worldwide as having acquired tremendous popularity. They encompass RocketHub, Crowdfunder, Indiegogo and Kickstarter (Kirby, & Worner, 2014). These websites are used to facilitate all kinds of crowd funding activities whereas others like Foodstart, the platform for restaurant funding, pay more attention on niche areas. As a result of the progressive number of crowd funding sites and the dramatic increase in consumer demand, crowd funding contributions are rising as well.

Basically, crowd funding has been on the peripheral of economic activities for a considerably long time in different forms based on convenience. Regardless, crowd funding platforms only became significant in 2006 in the United Kingdom after it was made viable by the emergence of the technological advancement of Web 2.0 applications over the internet (Bruton et al., 2015). Notably, Web 2.0 is a technological innovation that enables internet users to partake in the creation of content that is hosted on solid websites. It focuses on the ‘wisdom of the crowds’ in the design of websites and software development in order to enhance involvement. These technologies encompass EBay and Wikipedia since they enable several users to make their contributions to the general design of the website.

This technological advancement was a method of creating websites for crowd-funding which made the business viable in general by minimizing the cost of transactions related to the provision of these services. Web 2.0 allows for user involvement by enabling borrowers to create profiles, add photos and describe how they intend to use the investment or loan (Lehner, Grabmann, & Ennsgraber, 2015). This provides a social networking element to the online platforms whereby borrowers willingly provide information to prospective lenders. Generally, costs are minimized greatly for all parties involved through the use of online services. Moreover, it provides crowd funding with a wide-reaching perspective.

As previously mentioned, the financial crisis of 2007-2008 enhanced the popularity of crowd funding platforms (Lehner, Grabmann, & Ennsgraber, 2015). The financial crisis led to the failure of several banks worldwide. Subsequently, there were new regulations for capital adequacy in banks. Consequently, credit providers became progressively limited in their capacity to lend the real economy some money. Essentially, the reduction in bank liquidity has resulted in the expansion and growth of crowd funding and peer to peer lending. In addition, the new regulatory requirements of banks have made it even more difficult for small and medium-sized business owners to obtain loans from conventional financial institutions. The peer to peer lending and crowd funding sectors took advantage of this situation, whether intentionally or not, and today they have become a vehicle for borrowers to acquire a loan at a highly reduced interest rate in comparison with the use of traditional channels of providing credit. In addition, peer to peer lending is known to provide a higher rate of return with relativity to conventional forms of investment like government bonds and savings. Generally, growth in the crowd funding and peer to peer lending markets has been dramatic, especially following the year 2010 when the industry enforced limitations on the credit worthiness of borrowers for the purpose of tackling high rates of default (Lehner, Grabmann, & Ennsgraber, 2015). It is important to note that while peer to peer lending can occasionally be classified under crowd funding, crowd funding can never be considered as peer to peer lending since it encompasses several other elements as well.

Notably, one of the most imperative elements behind the drastic growth of crowd funding platforms over the recent past is the global economic crisis of 2007 to 2008 (Burtch, Ghose, & Wattal, 2013). This period was highly disruptive and led to the struggle of several established business enterprises. While there are businesses that endured throughout this period independently, many of the others that survived did so by relying on various crowd funding platforms.

In the year 2012, President Barack Obama authorized the JOBS Act (Bannerman, 2013). The Act eased former solicitation barriers on small and medium-sized business and also regulated online equity crowd funding. In the same year, there was an eighty one percent growth on the equity crowd funding industry. Projections indicate that by the year 2025 they market will attain one trillion dollars.

In 2013, the platform SyndicateRoom disrupted the equity crowd funding party by being the most initial equity crowd funding platform in the United Kingdom to enable the crowd to co-invest in professional-related ventures (Ahlers et al, 2015). In 2014, Kickstarter raised over one billion dollars. The crowd funding industry in its entirety was approximated to be valued at 5.1 billion dollars in 2013 (Ahlers et al., 2015). During this year there were five hundred trading crowd funding platforms and nine thousand domain names that had been registered in relation to crowd funding.

The histories of crowd funding, peer to peer lending and microfinance provide an overall view of how far these financial systems have come since they were established. While certain aspects may have been altered in order to suit the needs of the modern society, it is evident that all these micro-funding concepts have been in existence for a considerably long time. Their histories all indicate that they were established to serve good causes such as helping the poor to meet their financial needs (Özdemir et al., 2013). However, it is essential to examine the perspectives of small and medium-sized business owners in relation to the same in order to determine whether these good intentions are actually being realized or somewhere along the way these micro-funding concepts lost or shifted their sense of purpose.

THEORETICAL FRAMEWORK

The Disruptive Technology Theory

Several theories can be used to explain microfinance and all its concept about small businesses and their owners. One such theory is the disruptive technology theory. The disruptive technology or innovation theory was introduced by Christensen in 1997 and later advanced by (2015), Shwienbacher and Larralde in 2010 and Golic in 2014. According to the theory, “Disruptive technologies or innovations are those that create substantial growth by offering a new performance trajectory that, even if initially inferior to the performance of existing technologies, has the potential to become markedly superior” (Hollander, 2015). Technology or innovation that interferes with the mainstream technology or innovation usually always performs worse at first with relativity to the mainstream technology. However, because the disruptive technology lacks a value proposition that is valued by the consumers of the present technology, it develops in a niche of the market where the customers appreciate its performance.

Primarily, this niche can be found at either the low end of the market that belongs to the established technology or it could be an entirely new and unexplored market that is not part of the market that is claimed by the present mainstream technology. Normally, the disruptive technology is usually in a better position to serve the second market better that the original technology (Hollander, 2015). The reason for this is that it has particular elements that may be more appealing to the second market. For instance, the disruptive technology is usually less costly, simpler, smaller, and better-suited for these markets. Notably, the main technology’s performance is better than that of the disruptive technology for the reason that with time the mainstream technology often innovates their services and products for the benefit of the most demanding consumers who mainly comprise the high end of the market (Lehner, Grabmann, & Ennsgraber, 2015). The mainstream technology is also better with regards to product capabilities and performance because the disruptive technology is established for the purpose of targeting the customers found at the low end of the market where the services and outputs it provides will be viewed as being more suitable, cheaper, simpler, and more convenient (Hollander, 2015).

This idea directly translates to the concept of micro-funding, and particularly about crowdfunding, peer-to-peer, and micro-financing. Micro-funding is viewed as a funding method that is merely a supplement to and in certain contexts, a replacement of conventional financing methods such as bank loans and government grants. According to researchers, micro-funding is particularly imperative with regards to providing the initial capital for businesses that are only starting up as well as for the provision of financial support to small and medium-sized businesses. For these reasons, micro-funding can be considered to be a disruptive technology by conventional funding methods.

Businesses that are only starting up usually need massive capital injections for the purpose of starting the business successfully. Primarily, it is essential for a business that is starting up to ensure that it has enough funds to be successful as opposed to failing in its early stages. Fundamentally, the start-up should be sustainable. Micro-funding provides a business owner with such an opportunity: to start out successfully and maintain the success before the company begins to return a stable revenue stream and becomes acceptably established.

The disruptive technology theory is primarily applicable to the concept of micro-funding. The first reason for the above inference is that micro-funding was introduced into the market while traditional methods of funding were the only source of funds for business owners. Therefore, it came in as a supplement and can be said to be a disruptive technology as it disrupted the previous status quo where for instance, banks were the only source of funds for private business owners. The second reason for the inference that micro-funding is a disruptive technology is that it introduced itself as a funding method for the lower end of the market customers (Micic, 2015). As previously mentioned, a disruptive technology cannot just enter the market and replace the mainstream technology. Therefore, since it cannot infiltrate the high-end market, the only option left is for it to serve the lower end of the market and work its way up. Micro-funding mainly provides financial services to low-end customers. Importantly, micro-funding is a disruptive technology because it provides services to small and medium-sized businesses in the market. The owners of such businesses are usually highly unlikely to receive a loan or any other required financial services from the mainstream financial institutions like banks which leave them with the option of micro-funding.

Over time, the disruptive technology, in this case, micro-funding, experiences considerable growth and becomes competitive in the industry against mainstream technologies like banks. There are currently several micro-funding establishments in the contemporary business society. More and more individuals and small and medium-sized business owners resort to micro-funding solutions for their financial queries. This concept indicates substantial growth. Some of the most commonly used micro-funding options are crowd funding, peer to peer lending, and micro-financing.

POPULAR MODELS OF MICRO-FUNDING

There are various models that are deployed to enhance the understanding of how various micro-funding practices are performed. The comprehension of the actual practice of micro-funding is highly likely to enhance understanding of the perspectives of small and medium-sized business owners towards micro-funding options.

1. Microfinance models

For the purpose of micro-finance, there is the bank partnership model. In the bank partnership model, all the ground work like recovery of loans, sanction of loans and evaluation of loans is conducted by the micro-finance institutions (Blanco et al., 2013). However, the loan is recorded in the books of the banks as opposed to the micro-finance institutions. In this case, one bank can establish partnerships with several micro-finance institutions. Usually, the micro-finance institutions charge a service fee from borrowers for the services of credit management. The bank partnership model uses the advantages of social intermediation of the microfinance institutions as well as the financial intermediation of the bank. Both the microfinance institutions and the banks are required by this model to use their primary competencies to offer the most optimal outcomes.

The individual banking model requires that credit be provided directly to borrowers as well as all other things like loan repayment, disbursement, repayment and savings collection which must be conducted on a personal ground (Blanco et al., 2013).

The Grameen model was first advanced by Dr. Mohammed Yunus in Bangladesh. The model requires that about five members of a Joint Liability Group combine forces with about 7 to 10 other groups from a similar community to establish a center (Blanco et al., 2013). Savings are considered to be a mandatory aspect and credit worthiness is denoted by the entire group’s credit worthiness. This method is becoming widely adopted all across the world by various microfinance institutions.

1. Peer to peer lending model

In peer to peer lending, one of the most commonly used models is the SGH model whereby a group of about fifteen to twenty members get together and pool their savings for the purpose of lending to one another (Duarte, Siegel, & Young, 2012). The members of the group augment their resources through a bank or a microfinance institution. On occasion, there are nongovernmental organizations that operate microfinance programs through the organization of SGHs to serve as microfinance institutions that acquire external loan funds in large amounts and channel them to members through the SGHs (Duarte, Siegel, & Young, 2012). Notably, the group can also constitute fifteen to twenty five individuals who poor their savings together and approach a microfinance institution to acquire extra funds along with the deposit services for their own savings.

In addition, there is the client segregated account model. In this peer to peer lending model, a lender is directly matched with a particular borrower via an intermediary platform (Duarte, Siegel, & Young, 2012). Thereafter, a contract is established between the lender and the borrower with minimal involvement of the intermediary platform. This model allows for lenders to bid on loans in the form of an auction whereby some services provide an automated bidding option. Funding Circle is popularly known for this. All the funds from borrowers and lenders are detached from the balance sheet of the online peer to peer lending platform and pass through a client account that is legally segregated. Notably, the peer to peer lending platform has not claim if the platform collapses for whichever reason. The lender and the borrower will maintain their contractual obligation to one another have even if the peer to peer lending platform collapses. The fees from both the borrower and the lender are paid to the peer to peer lending platform.  The borrower pays a fee of origination on the basis of one’s particular risk classification. The borrower also an administration charge and late fees (Duarte, Siegel, & Young, 2012). As per the peer to peer lending platform, the lender pays an administration fee and any other supplementary fees for such things as the automated service provided by the platform.

Notably, in case the lender wants to sell his or her loan portfolio to the peer to peer lending platform or on a secondary market, then he or she will encounter some charges. The peer to peer lending platform provides the service of collection of loan repayments as well as preliminary assessments to determine the credit worthiness of the borrower. The fees cater for the cost of these services, the business costs, and the loan compliance and origination.

• Crowd funding models

With regards to crowd funding, there are five commonly used models in the contemporary society. The first is donation-based crowd funding. Donations are considered to be the most prevalent and direct way of crowd funding a particular project. Basically, donation-based crowd funding is considered to be a philanthropic approach (Ordanini et al., 2011). The reason for this is that the incentive for donators to make their donation is not usually financial gain or returns. On the contrary, donators may seek to find their rewards in the fulfilment of knowing that they donated their money for a good cause. For example, this could include crowd funding to support a local charity.

The second model is reward-based crowd funding. The reward system advances the donation further. In this case, lenders or donators and provided with a chance to select the amount of support or donation they would prefer to make and in return, they would be given special rewards (Ordanini et al., 2011). Essentially, the more money one spends, the larger the reward will be. The rewards serve as a major incentive for individuals to offer their support to different projects and events.

The third crowd funding model is equity-based (Ordanini et al., 2011). In this model, the management of the project offers a share of the profits to the crowd. When the point of break-even is realized and profits are acquired, the investors are able to receive their specified share of profits. This is often a risky venture since in many cases startup businesses are not as successful as previously anticipated. In equity crowd funding, the lenders do not have much control over the project.

Moreover, there is lending-based crowd funding. In nations where crowd funding is legally acceptable, crowd funding platforms are often able to provide lending possibilities to investors and entrepreneurs (Ordanini et al., 2011). This is with particular regard to small and medium-sized business owners. In this case, the lenders are allowed to select their preferred investments and the micro-entrepreneurs are able to take advantage of the low rates of interest. There is also the option for social lending model whereby no interests apply.

Lastly, the investment-based crowd funding enables interested individuals and groups to receive equity in the organizations that they support (Ordanini et al., 2011). The lenders are allowed to select a project on the basis of its potential success and sustainability or even mutual values. Basically, the lenders purchase shares and this may allow them some decision-making rights in the particular project. Occasionally, lenders only purchase a share of the revenue. This means that they do not share in the ownership; rather they receive a financial reward when a profit is realized.

PERSPECTIVES ON MICRO-FUNDING

Perspectives on Micro-Finance

Microfinance is generally perceived to be a good thing for a diversity of reasons. The first reason is that it provides small and medium-sized business owners with the necessary capital for their business operations and expansion endeavors (Simeyo et al., 2011). Generally, when small and medium-sized business owners have an effective credit source, they are able to conduct better planning for their business activities as well as management of their cash flow. Regardless of the fact that the loan sizes on the basis of microfinance are usually considerably small, there are occasions when a mere one hundred dollars is considered to be a substantial amount of money.

Another reason why microfinance is perceived to be a positive aspect is that via the progressive income generated by the small and medium-sized businesses along with the capacity to save and acquire loans, microfinance enables the poor to build their assets. For instance this can be done through: acquisition of land, construction or improvement of their homes, and buying poultry and livestock (Galak, Small, & Stephen, 2011).

The third among the most common perceptions about microfinance is that it can minimize the vulnerability level of poor individuals. Access to insurance, savings and credit can aid them in smoothing cash flows and avoiding periods when access to education, shelter, clothing and food is lost.

The above mentioned are the commonly-held perceptions about microfinance. The central point of why microfinance is considered to be such an attractive venture is that it allows the poor to make their way out of poverty (Kumar, Bohra, & Johari, 2010). These people are loaned small amounts of money to enable them establish their lives in a sustainable manner such that in future they are able to take care of themselves. From the perspective of the borrowers, who are the small and medium-sized business owners, it is largely important to them that somebody has looked at their business ventures and their lives and decided that they are creditworthy despite their poor circumstances. This is a powerful motivation for poor individuals. Microfinance has faith in them that the traditional financial institutions like banks does not have. It makes them thing that if a certain organization views them as being creditworthy then perhaps there is something worthwhile about their business. Subsequently, this motivates them to push themselves further.

However, the facts of the situation are rather contradictory. The microfinance business has intense tension. The idea of helping the small and medium-sized business owners without necessarily being forced to participate in trade-offs is highly attractive although false. The basic presumption of microfinance is that profitability does not contradict making an impact that matters in the lives of micro-entrepreneurs (Kumar, Bohra, & Johari, 2010). However, in actuality this is not the case. In several areas, it is considered to be costly to provide microfinance which mandates a high interest rate for the purpose of sustainability. Ultimately, this ends up contradicting several of the objectives of starting the microfinance operation initially.

Relatedly, micro-entrepreneurs are largely affected by the issue of trade-offs. The interest rates that these small and medium-sized business owners are charged for borrowing money has turned out to be more burdensome in the long run and comparisons can even be made to the traditional financial institutions like banks. The issue of tensions and trade-offs has become increasingly progressive in the past many years since the microfinance operation became characterized with profitability. Consequently, private investors have been attracted to the industry (Bateman, 2010). Notably, these private investors are different from foundations or social investors. On the contrary they encompass investment banks and hedge funds who have the intention of buying stock and earn a fifty percent return on equity. This alters the nature of microfinance in general in terms of who it attracts and who its investors are. The micro-entrepreneur is eventually affected by the fact that the microfinance business has been more of a profitable venture than one that aims to help the poor people establish or re-establish themselves.

In the past years, this state of affairs has created a catastrophe in the microfinance operation as people attempt to determine how they can take responsibility for what has happened and find a resolution for the situation. Micro-entrepreneurs still engage in microfinance because they are considerable more desirable to them than banks and also have a higher chance of accepting their business agendas than banks. However, according to certain research there have been unwilling borrowers who opt to not engage in the entire system out of fear of the interest rates imposed on them by the institution (Sarumathi, & Mohan, 2011).

Another perspective concerning microfinance among the micro-entrepreneurs is that several of these small and medium-sized business owners confess to not using their loan proceeds from microfinance institutions business purposes. Essentially, majority of microfinance loans are utilized for the purpose of funding consumption and help individuals purchase the basic needs for survival. For instance, a research study conducted in South Africa indicates that microfinance use for consumption accounts for ninety four percent. Resultantly, the borrowers end up not generating new income that they are supposed to use to repay their previous loans. As a resolution, they take out new loans and use them to pay back the old ones.

Generally, borrowers of microfinance loans obviously appreciate the value of this service in helping them to handle certain situations in their lives and particularly in times when they need the help the most. This is evident especially when a microfinance institution is established in a new environment and interested individuals collect in large numbers to borrow money (Sarumathi, & Mohan, 2011). In several cases, they even return for supplementary loans. Micro-entrepreneurs state that they often pay these loans at excessively high interest rates on an annual basis in which case the primary motive for repayment is not group pressure or collateral. On the contrary, they pay back so as to ensure that they can maintain future access to the microfinance services. This raises the concern of debts. Some micro-entrepreneurs wonder is microfinance actually helps them or simply worsens their situation by over-indebting them.

The pressure of paying back microfinance debts is rather high for most of these micro-entrepreneurs who always end up needing financial help every other year. This indicates that certain micro-entrepreneurs perceive that the present microfinance system is not actually protecting the individuals it is intended to empower. They perceive that microfinance has deviated from its initial objective and began indulging loan sharks. When small and medium-sized business owners use micro-loans for the purpose of funding their startup businesses, they often encounter a shortage in consumer demand (Hossein, 2016). The reason for this is that their prospective consumers are usually just as poor if not poorer, and therefore lack enough money to be sufficient and reliable customers for the business. This may lead the business to fail and results in the undesirable cycle of over-indebtedness and lead to extensive poverty among the borrowers.

Many micro-entrepreneurs perceive that the guaranteed beneficiaries of microfinance operations are the lenders. There are even those who state that in certain occasions the interest rates charged may be an estimated two hundred percent annually. While the traditional name for such lenders is loans sharks, when operating in the microfinance business they are referred to as microfinance providers. Some micro-entrepreneurs perceive that as much as microfinance systems help them with much-needed funds, in the long run it may turn out to be a loss since the interest rates that they pay back may surpass the profits that the business makes.

Regardless, microfinance is still a powerful concept in the contemporary business society. There are varied opinions as to the benefits and downfalls of the same. Several small and medium-sized business owners hold different views concerning the concept. Whereas some believe it is helpful even in the long run, yet others are strongly opposed to its long run effects of constant indebtedness (Hossein, 2016).

Through the microfinance models provided in the paper, it is evident that the microfinance business has expanded largely and become a force to be reckoned with in society. Essentially, it is establishing partnerships with banking institutions among other recognizable financial institutions. However, this has a major impact on how small and medium-sized entrepreneurs view microfinance institutions (In Tasca et al., 2016). In essence, the primary reason why small and medium-sized entrepreneurs turn to microfinance institutions in the first place is because they cannot successfully access the loan services offered by traditional financial institutions like banks. Fundamentally, not only are the interest rates too high, the banks are also mostly highly skeptical of their credit worthiness. In this case, microfinance institutions prove to be a valid alternative.

However, these small and medium-sized entrepreneurs are becoming increasingly apprehensive of the involvement of banks in the microfinance sector. Today banks are acquiring and enhancing their stakes in microfinance. While this provides more money for microfinance institutions to avail as loans to micro-entrepreneurs, it is also notable that such a move gives banks an even bigger footing in the microfinance business. In the end, it is highly likely that the small and medium-sized entrepreneurs will suffer for it. For instance, the interest rates are likely to increase tremendously as a result of the fixed mindset of banks to make money and increase profitability. Generally, the partnerships between microfinance institutions and banks causes apprehensions among micro-entrepreneurs since the purposes of these two establishments should differ completely (Galak, Small, & Stephen, 2011). Essentially, while banks are driven primarily towards profitmaking, microfinance institutions were actually established for the purpose of helping the poor establish their lives and enhance the economy one way or another. A partnership between institutions with such diverse agendas demands that one has to shift its interests to suit the other. Since it is virtually impossible for banks to suddenly lose their interest in profit maximization, the only other alternative is for microfinance institutions to shift their focus to profitmaking as well (Galak, Small, & Stephen, 2011).

Signs of this are already evident with the rapid increase of interest rates in several microfinance institutions. It is stated that loan sharks are prevalent in the microfinance sector which should not be the case at all. Regardless, small and medium-sized business owners are growing increasingly skeptical and apprehensive concerning microfinance as a result of the institutions’ involvement with banks (In Tasca et al., 2016).

Perspectives on Peer to Peer Lending

Peer to peer lending purposes to create a link between the demand for small loans and its supply from the organized financial services sector. The reason for this is that credit institutions and banks consider it unprofitable since the costs associated with processing an average microcredit does not validate the lending (Lee, 2016). Peer to peer lending targets many demand areas of microcredit such as: wedding loans, home renovation, student loans, small business loans and personal loans. There are several reasons why peer to peer lending is becoming increasingly popular. For instance, in India, the number of individuals who have an insubstantial credit score is large. Therefore, for any small credit requirements, individuals are usually driven to approach loan sharks for assistance.

Peer to peer lending is therefore viewed as a viable alternative in such a population. The reason for this is that it attempts to consolidate and tap the market for minor credit demands. It operates as an intermediary and aggregator of prospective borrowers of small credit and individuals who have additional money. Peer to peer lending is perceived as a means of creating a win-win system by removing the loan shark from the picture (Workshop on E-Business, Shaw, Zhang, & Yue, 2012). Whereas loan sharks function in a local market, the peer to peer lenders function via the internet. This enables them to connect lenders and borrowers from different geographic regions and operate as both intermediaries and aggregators between them.

From a global perspective, small businesses constitute approximately ninety percent of overall businesses. Therefore, the small and medium-sized businesses that demand small credit is tremendous. The general perspective towards peer to peer lending is largely positive in comparison with microfinance. Whereas microfinance is perceived to entertain several loan sharks, people who take advantage of the poor by imposing extremely high interest rates on loans, peer to peer lending is hailed for its ability to conduct its operations without the interference of loan sharks. Small and medium-sized business owners find this form of micro-funding to be fair and more flexible.

Moreover, micro-entrepreneurs view peer to peer lending from the perspective of convenience. The internet is widely accessible globally in the contemporary society. Therefore, more small and medium-sized business owners have the capacity to access funds through peer to peer lending. Relatedly, smartphones have become highly prevalent in the modern society. Peer to peer largely relies on technology evidently (Davis, & Gelpern, 2010). With the use of smartphones, the connection between lenders and prospective borrowers is made easier and more convenient.

Recently however, there have been developments whereby peer to peer lending platforms are merging with banks. The primary reason for such collaboration is so as to enable access to a large pool of money from major financial institutions like banks and avail them through peer to peer lending platforms. However, this may not be as simple as it sounds. Small and medium-sized business owners are apprehensive about the possibility of interest rates going up to a level which they would be unable to fulfill and borrow loans sufficiently. As it is now, the peer to peer lending platforms are adequate for the purpose of helping small and medium-sized business owners. However, the involvement of banks complicates the entire scenario since the only reason why micro-entrepreneurs resort to peer to peer lending platforms is because conventional financial institutions like banks are not involved since they demand too much for one to qualify as being credit worthy. The fear is that when banks get included in the process, micro-entrepreneurs will have limited access to peer to peer lenders and loans (Johnson, Ashta, & Assadi, 2010).

Based on the information provided initially, it is evident that peer to peer lending has several advantages. Concerning the interest rates, peer to peer lending has lower rates that traditional financial institutions like banks. More importantly, it does not allow any room for loan sharks to take advantage of small and medium-sized business owners who are desperate for capital to be used for different purposes. On the contrary, the peer to peer lending online platforms themselves establish what the interest rates would be for every borrower on the basis of risk evaluation (Davis, & Gelpern, 2010). Small and medium-sized business owners appreciate the fact that peer to peer lending does place them in danger of encountering loan sharks who are merely lenders that aim to take advantage of poor borrowers. Peer to peer lending is a fair way of dealing with small and medium-sized business owners since the interest rates are mainly dependent on a particular borrower’s risk evaluation. Over the recent past, the attitudes of micro-entrepreneurs with regards to peer to peer lending is progressively becoming more favorable that their attitude on micro-finance.

Perspectives on Crowd funding

Crowd funding has expanded drastically over the recent past since the global economic crisis of 2007-2008 (Bruton et al., 2015). It has become an actual option to raise venture capital for small and medium-sized businesses.

In crowd funding, the online platform is largely important as well. Money is collected for a particular purpose from a large pool of people. With regards to small and medium-sized businesses, money can be collected and loaned to a micro-entrepreneur for the purpose of starting up a business or sustaining one (Mollick, 2014). In the USA especially, crowd funding has become increasingly popular and relevant to small and medium-sized business owners since they are often in need of funds for various purposes.

There is generally limited research on the perceptions of micro-entrepreneurs with regards to crowd funding. In comparison with the peer to peer lending and microfinance, crowd funding is a new concept. People are only getting accustomed to crowd funding as a means of funding small and medium-sized businesses. However, with the rapid expansion in this particular industry, it can be presumed that micro-entrepreneurs are highly receptive to the use of crowd funding to fund their businesses (Muller et al., 2013). More and more people are opening crowd funding platforms and it appears to be a promising venture in the future of the financial sector.

The research into the perspectives of small and medium-sized business owners is considerably limited at present. This indicates the need for a research study to be conducted in this particular area. It is imperative to acquire the perceptions of small and medium-sized business owners with regards to crowd funding so as to suitably predict the future of the business and inform upcoming platforms.

PROBLEMS FACED BY MICRO-ENTREPRENEURS

There have been several research studies conducted on the various micro-funding options of microfinance, peer to peer lending and crowd funding. Collectively, there are certain problems that micro-entrepreneurs encounter. Firstly, micro-entrepreneurs report having a lack of considerable and adequate knowledge of the procedures involved in various micro-funding solutions. There are certain procedures involved in microfinance that small and medium-sized business owners may be clueless about. This may hinder their prospects with regards to successful loan seeking and acquisition. Alternatively, peer to peer lending and crowd funding require the use of the internet and online platforms. There are several individuals, especially those among the poor, who are not familiar with the correct use of the internet and various online platforms (Yum, H., Lee, & Chae, 2012). This may cause a barrier between micro-entrepreneurs and their access to crowd funding and peer to peer lending solutions.

Secondly, small and medium-size business owners report to have an issue with interest rates. Particularly, micro-funding institutions are known to lack adequate transparency in relation to the interest rates given for various loans. For instance, with the prevalence of loan sharks in various microfinance institutions, the interest rates have been noted to shoot up to two hundred percent and for reasons which the small and medium-size business owners are not provided with (Yum, H., Lee, & Chae, 2012). This has created an air of mistrust among micro-entrepreneurs and microfinance institutions which has seemingly progressed over the recent past.

In addition, micro-entrepreneurs encounter delays in the sanctioning of loans. The needs of different small and medium-sized business owners vary greatly. While some may require the loans for starting up new businesses, others may need money to save their existing but failing businesses from bankruptcy and subsequent closure. The latter is a matter of urgency and occasionally it may take a long time for loans to be sanctioned which may have dire consequences for these small and medium-sized business owners that are in desperate need of money urgently in order to save their businesses.

Another problem which small and medium-sized business owners report to encounter is fixed installments without the consideration of cash flow (Chandy, & Narasimhan, 2011). Essentially, the available micro-funding options often fix particular installment amounts. This is regardless of whether the micro-entrepreneur earns enough to comfortably fulfill this obligation at the predetermined installment amount or not. Notably, small and medium-sized businesses do not bring in a lot of money in comparison with the major established businesses. In consideration of startup businesses, it may take a long time before the small or medium-sized business begins to have a steady sufficient cash flow. Microfinance institutions especially do not pay much regard to such a circumstance and require that their loans are paid at fixed installments.

Additionally, micro-entrepreneurs encounter the problem of inadequate financing. Credit worthiness is largely important in the business of micro-funding. This indicates that a business owner must have sufficient credit in order to receive a loan of any kind. Depending upon one’s credit worthiness, the micro-funding institutions may determine how much money a small and medium-sized business owner may receive from the institution or platform. There are times when a micro-entrepreneur requires a particular amount to save one’s business or to setup up a particular business. However, due to lack of sufficient credit, the micro-funding institutions and platforms may only be able to give a certain amount which may not be adequate to serve the purpose for which it is intended.

Lastly, there is the issue of lack of training. Most of these micro-funding institutions and platforms provide money for these small and medium-sized business owners without offering them any advice or training on how best to utilize the capital which they have been provided with in order to earn substantially from it (Chandy, & Narasimhan, 2011). This is one of the major reasons why small and medium-sized businesses never make it past the early stages of development before failure and closure. As a result, the micro-entrepreneurs feel that they are constantly indebted to micro-funding institutions and platforms without any major additions to their own personal lives.

 

 

 

 

 

 

 

 

 

 

 

SUMMARY

Chapter two mainly handles the literature review section. The purpose statement for this chapter is provided whereby it is essential to establish other research studies and findings conducted and discovered by other researchers on the area of micro-funding in relation to the perspectives of micro-entrepreneurs regarding crowd funding, peer to peer lending and microfinance.

This chapter also provides the documentation section. Whereby it has been established that for the purpose of the literature review section, majority of the research material will be derived from academic online platforms, most of which dates only as far back as five years. Websites such as Google Scholar and the Griffith Online Library will be used to provide the necessary material for the completion of this chapter.

Subsequently, the literature review section has several themes and subtopics. The first themes is background information. In this case, various definitions for the terms used in this chapter are provided. Primarily, definitions for microfinance, peer to peer lending and crowd funding are highlighted. The benefits of micro-funding options are provided. They encompass: economic development, gap-filling for banks and reduced costs of operation in general among others. The risks are provided as: risk of default, risk of fraud and platform risk among others.

The concepts of micro-funding are divided and addressed separately in terms of history and perspectives of small and medium-sized business owners. Peer to peer lending dates back to as early as the sixteenth century (Chen, & Immorlica, 2013). Over the years it has gained more popularity but the turning point was during the global financial crisis of 2007. People began to shift from the conventional forms of acquiring loans to micro-funding solutions. Microfinance as well has been in existence for several decades. Its popularity however became apparent during 1980s when microfinance institutions realized that they could actually loan money to the small and medium-sized business owners and make profits as well (Armendariz, & Labie, 2011). Alternatively, the earliest form of crowd funding dates back to the 1990s. It has since established itself widely via the online platform and grown increasingly popular over the years. Just recently, the US president, Obama, enforced an Act that eased the restrictions on crowd funding in relation to small and medium-sized businesses (Sannajust, Roux, & Chaibi, 2014).

There is also a theoretical framework section whereby the theory proposed by Christensen in 1997 is addressed (Hollander, 2015). The Disruptive Technology Theory is used to explain generally how micro-funding came into the market as competition for the mainstream technology, which are the traditional financial institutions like banks. When micro-funding was introduced, it was able to attract the lower part of the market whereby the people and the business found there were considerably poor and small and therefore could not gain access to mainstream services like loans from banks. Therefore, micro-funding became their mainstream technology since it was able to give them something that banks has declined to provide for them.

Various popular models of micro-funding are explored in order to enhance further understanding of precisely how micro-funding options are executed. With regards to microfinance models, there are the: the bank partnership model, the individual banking model and the Grameen model (Blanco et al., 2013). Secondly, in peer to peer lending there are the: SGH model and the client account segregated model. Lastly, crowd funding is divided into five major models. These are: donation-based crowd funding, reward-based crowd funding, equity-based crowd funding, lending-based crowd funding and investment-based crowd funding.

In terms of perspectives, small and medium-sized business owners have mixed reactions towards microfinance. Today, microfinance is a controversial topic in the financial sector (Roodman, 2012). Mainly, from a general perspective microfinance is perceived to provide micro-entrepreneurs with financial solutions to aid them out of difficult business situations like bankruptcy. Moreover, it can also provide them with capital to set up their own businesses. However, it is also a prevalent perspective that microfinance has become corrupted by loan sharks whose main intent is to obtain money from the small and medium-sized business owners by imposing high interest rates on the loans given to these people (Karim, 2011). This makes it difficult for micro-entrepreneurs to trust the system since they are constantly paying interests as high as two hundred percent. Regardless, microfinance solutions are still widely used by small and medium-sized business owners which means that the overall consensus is that they are beneficial to these micro-entrepreneurs.

Regarding peer to peer lending, it is highly appreciated due to its ability to eliminate loan sharks from the picture (Herzenstein, Sonenshein, & Dholakia, 2011). Peer to peer lending uses the online platform to connect lenders and borrowers. The intermediaries vet the borrowers and determine whether they are credit worthy or not. Ultimately, the perspectives of micro-entrepreneurs towards peer to peer lending are more favorable with relativity to their perspectives towards microfinance. Peer to peer lending is ostensibly more considerate in terms of interest rates.

Crowd funding has only emerged recently and become popularly used among small and medium-sized business owners. There is currently limited research into the perspectives of small and medium-sized business owners with regards to the use of crowd funding to support their startup or upcoming businesses. However, judging from the rapid expansion of the crowd funding sector, it is evident that micro-entrepreneurs consider it to be a viable option for this purpose or otherwise they would not engage in it as widely as they do (Sundararajan, 2014).

There is also a section on the problems that small and medium-sized business owners claim to encounter during their interaction with micro-funding. These constitute: lack of training, lack of transparency in interest rates, inadequate financing, delays in sanctioning loans and lack of knowledge on the procedures of micro-funding among others (Yum, H., Lee, & Chae, 2012).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conclusion

All in all, while the information available on the use of microfinance, peer to peer lending and crowd funding is largely available, there is relatively little information in relation to the perspectives of small and medium-sized business owners concerning these financial platforms. Observably, in several cases the perspectives of the lenders are considered more than those of small and medium-sized business owners. This is indicative of a deficiency in research studies in this area. This further validates and enhances the significance of this particular research study which shifts the focus from the lenders to the borrowers, and particularly, small and medium-sized business owners.