Loan vs. Crowdfunding: Which is the Best Option for Business Funding?

Business.com / Funding / Last Modified: February 22, 2017

Does your business need funding? Find out whether a traditional business loan or crowdfunding would be the best fit for your venture.

Funding your business is the first big challenge you will have to contend with. The best option for funding isn’t always the traditional route.

At the same time, jumping on the hype surrounding crowdfunding may not be the best option for you either. 

It’s a difficult decision to make. So whether you are thinking about looking up your banking details or preparing your video for a grand online funding campaign, look at the pros and cons of each option first.

Related Article: Does Crowdfunding for Startups Actually Work?

More Cash through Crowdfunding

Crowdcube, which is a crowdfunding platform in the UK, reported that JustPark raised a record £3.7 million from investors.

And they did this through their platform alone. If your idea is good enough, you can ask for huge amounts of capital.

Banks are far more cautious and usually, won’t entertain such requests. If you have an idea and you need a lot of money, crowdfunding has far more potential. 

What Type of Business Are You?

Crowdfunding isn’t ideal for every type of business. Look at the format of crowdfunding for more information.

To pitch your company, you have to produce a video and explain why your concept is going to change people’s lives. Now if you are trying to set up an accountancy firm, this isn’t going to give you the traction you need to gain any investment. 

People on crowdfunding prefer flashy ideas that are genuinely going to change the world. If you are setting up a business in an established industry, this simply isn’t going to appeal. 

Banks are far better for more traditional business concepts. They are less concerned with how you are going to alter people’s lives and are more concerned with the potential for getting their money back, plus interest.

Where are You Based? 

It doesn’t actually matter where in the world you are operating from. What does matter is how big your potential audience is. Local firms serving a town or city are less likely to have success via crowdfunding because they have a far smaller audience to aim for.

The ideas that get funded are the ones that sell products and services all around the world. This opens up your potential investor pool and thus increases the chances of you getting the money you need to grow your company. 

Related Article: Prep, Pitch, Persevere: The Three P’s of Successful Crowdfunding

Operating Your Company

Crowdfunding and loans are two different things. With crowdfunding, you are not paying the money back. People are essentially donating to get your company into operation.

In return, you will give them perks. Some examples of perks include:

  • Regular updates on the progress of the business.
  • A selection of products.
  • The opportunity to provide some of your creative insight.
  • Be credited for the creation of the product or service.
  • Meet the developers 

On one hand, you are free from any financial pressures. But you do have to take a considerable amount of time away from your company to fulfill your pledges. With big projects, this can really hamper a growing business. 

Banks work differently because you do have to give the money back, plus any interest. You do have to start making money quickly, but you also don’t have to do anything for the bank.

All they want is regular payments and that’s it. Many would argue this is far less stress for you.

What about Timing?

Much has been made of how long it takes for banks to respond to loan applications. However, a crowdfunding campaign from start to finish can still take some months.

You have to drum up support and you have to go through the motions of achieving your investment.

In some formats, you may fall short of your target goal and receive absolutely nothing for all your hard work.

When compared side by side, both options are time-consuming. The difference with a bank loan is if you get accepted you receive your loan no matter what.

You can shoot for the moon with crowdfunding and still receive nothing.

Related Article: Applying for an SBA Loan vs. Funding From an Alternative Online Lender

Conclusion

There are pros and cons with both options. It’s up to you to think about your business and what the best option for you is.

It largely comes down to what sort of business you are and how much appeal you would have to the crowdfunding community.

Both options require a lot of effort and there are no guarantees that you will get the funding you seek.

To increase your chances of success, be transparent and be realistic about your aims. Nobody likes an eternal optimist.

Be ambitious without trying to do too much.

How will you get the funding you need for your company today?

 

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