If your business is new, small, persisting for a long time or not even “started” yet, sometimes getting funds for your business feels like mission impossible. However, there are many funding options available to the business owners. Among all the funding options crowdfunding is the new one, which has got massive popularity in the last few years.
In general, having many options is a good thing, but having so many options is not enough for your business. You need to figure out what’s right for you and your business and which can spell minimum trouble to you. Most of us know that 70% of the businesses fail in its initial stage, the reason is lack of funds but the chances of failure persist even after getting funds, it may be due to lack of managing skills or wrong selection from the funding option. This happens as many businesses have failed because they got stuck paying back a loan that they couldn’t afford.
Among the new financing options, crowdfunding is the one which is getting massive popularity these days. The crowdfunding market witnessed a growth by 167 percent worldwide in 2014, with $16.2 billion raised. In this Article we will know about crowdfunding, and what it can be for your business. You can know in a better way only when you will compare it with a traditional small business loan, as most of us know about the business loan and many of you must have even opted for it.
What is a Crowd Funding and How it Works?
Crowd computing is a funding option to the business owners through which they can get funds for their business easily. Here funds are provided by more than one person, you approach many people through the internet for funds. You have to present your idea and strategy for your business. If people find it wort to spend in your business they will give you funds. There are many websites where you can approach such people who can invest in your business. Against the funds, you have to give some equity in your business or some profit percentage.
Difference Between Crowdfunding and Small Business Loan
In Terms of Financing Originator
You get a small business loan either from a bank or an NBFC, you may apply for it online through the bank portal or directly by going bank.
But when it comes to Crowdfunding Funds are issued by the crowdfunding platform, but the money comes from several individuals or groups.
In Terms of Application and Approval Process
When you go for a business loan from any of the banks they will look for your credit score, bank’s statement, ITR and then business plan and strategy they will also ask for any other ongoing loan on you. As you can see that there are many eligibility criteria hence, at some point it can be difficult for you to get a business loan.
But you go for a crowdfunding for your business there are no such eligibility criteria. The most important thing required to get funds through crowdfunding is a good business plan which best of strategies so that it can attract most of the crowdfunding members to invest in your venture.
You need to have a good credit score both personal and of your business to get a business loan.
But crowdfunding has no relation to the credit score, you can get funds through crowdfunding even if you have low CIBIL.
Repayment Terms and Policies
When it comes to repaying a business loan, you can do so by repaying it in monthly instalments known as EMI. Options such as prepayment and part payment are also available through which you can repay your loan. There are some penalties and late fine if you are now able to repay the loan according to the agreement.
But when you o for a crowdfunding you need not pay EMIs against your loan for repayment. You need to keep the promise which you made in the agreement such as sharing equity or sharing profit percentage.
In Terms of Interest Rate
When you borrow from a bank or an NBFC they charge some percentage of interest on their lending which is a complete profit to them.
No interest is charged in a crowdfunding, you just need to equity in your business.
Benefits Vs Pitfalls of Small Business Loans
Benefits – If you get qualified for a small business loan, you have a guaranteed loan with you which you have to repay with regular payments i.e. EMI. There is no need of giving equity in the business to a third party.
Pitfalls – With small business loans you have strict lending criteria and in terms to qualify for it you have to fulfil the eligibility criteria, which can be difficult to qualify for all. It can take a long process and a long time to the loan to get disbursed in your account.
Benefits Vs Pitfall of Crowdfunding
Benefits – crowdfunding has the ability to create a lot of product hype even before the launch of the product and hence can attract investors. One can pitch for it and gain funding.
When you go for a crowdfunding you are not in any debt as you are with a business loan.
Pitfalls – crowdfunding exposes your business strategy and plan which you have made for your business resulting in your business plan to become public. One of the other drawbacks of this your idea can be copied and used by any third party.