Business loans have traditionally come from banks, credit unions, and other financial institutions. Thanks to the emergence of online loans and other types of online financing, the process of obtaining a loan has become far less complex for new businesses or those with less stable revenues to show. Crowdsourcing also provides some of these businesses with funding without the extended approval process of some traditional business loans. Examine the options carefully and consider whether a loan, crowdfunding or both are right for your business.
Business Loans vs. Crowdfunding at a Glance
|Interest Rates||Pay off interest over time||Repayment commissions vary by site|
|Fees||Fees set by Federal Reserve||Lenders take a % of funds raised|
|Application Process||As fast as 24 hours||Campaign length set by site used|
|Loan Requirements||Bank may specify loan purpose and qualifications||Borrower notifies donors of how funds with be spent|
|Best For||Traditional businesses||Innovative businesses that can attract attention|
Is a Business Loan or Crowdfunding Right for Your Business?
When weighing the pros and cons of traditional business loans versus crowdfunding, it’s important to understand the requirements of each. With traditional loans, your business would be required to pay off the debt with interest over time. With crowdfunding, you can structure your campaign as either an equity or debt investment campaign. Debt campaigns are often referred to as crowdlending or peer-to-peer lending. With equity crowdfunding, you can sell some of your ownership in the company to obtain funding, or you can offer donors some type of reward, such as the product you’re selling. With crowdlending, the repayment terms are set by the crowdlending sites. Examples of such sites include Kiva and Funding Circle.
Here are some of the things you should consider about both types of funding:
1. The Fees
With traditional lending, interest rates and lending regulations are set by the Federal Reserve. However, the final interest rate you pay is determined by your personal credit score and the credit score of your business. Business credit scores are provided through Dun and Bradstreet. Since the financial collapse of 2008, banks require business borrowers to provide a personal guarantee before they lend money, and it’s not solely based on the business’s financial information. The only fees typically associated with crowdfunding are fees charged by the crowdfunding websites. They normally take a small percentage of the total funds raised.
2. The Application Process
Before you can acquire a traditional business loan, you’ll have to apply through a bank or other lender. The lender may require you to provide other prerequisites such as a business plan, tax returns, a down payment, and financial statements. The application process can take anywhere from 1 to 3 months. With crowdfunding, campaign lengths are set by the platform being used. The business in possession of the campaign decides which length of time is best.
3. The Loan Requirements
When you apply for a bank loan, the bank may specify what the loan proceeds can be used for, including time in business, revenues, credit scores and possibly collateral. With crowdfunding, you have the freedom and the responsibility to notify donors of how the funds will be used. Some platforms may only release funds raised to a business if the business meets the goal established or may release funds raised to a business even if the business doesn’t meet its established goal. However, raising funds through crowdfunding typically is quicker than the traditional loan application process.
4. Your Own Marketing Savvy
A business plan shows a bank lender how the business intends to generate revenue and how it will pay back the loan. This requires a lot of planning, but not necessarily a lot of marketing know-how. However, with crowdfunding, businesses have to have solid marketing campaigns in place early on. Some platforms will dismiss all funding if the business doesn’t reach its full goal, making the upfront investment in marketing a critical element for success.
Crowdfunding can be a powerful funding tool for your businesses. Traditional loans can still be more difficult to acquire than they were prior to 2008, and women-owned businesses and minority-owned businesses still struggle to get equal access to capital. This is where crowdfunding truly shines, but it's important to consider other resources. With multiple income streams and the right kind of funding, you can build a financially stable business and stay independent of any singular investment. For more resources and information about business loans, take a look at this list of the best small business loan providers.