Business Loans Vs. Crowdfunding: Which Option To Choose?
Starting your own business is easier said than done. You begin with an idea and then check its credibility. If the idea is credible, you would need finances and support to set up your business. You would get plenty of support. However, arranging finance for your business can be challenging. You could explore options like asking funds from family and friends. Or you can seek funding from venture capitalists or angel investors, applying for loans or crowdfunding.
Let’s compare the two most popular options: Loans vs. Crowdfunding
What is Crowdfunding?
Crowdfunding is when a business, in lieu of a promised incentive, is funded by multiple investors. The incentive can be the company’s preview products and services, profit sharing for a stipulated period or shares in the company. Crowdfunding has the potential to raise huge sums for your business. In fact, quirkier the idea, higher the funds you can raise through crowdfunding. In crowdfunding, your investor base expands beyond your friends and families. Also, crowdfunding has been reinvented with the help of the ever-evolving social media.
What are your options for loans?
There are numerous loan options that you can avail for your business. If you need the loan amount for numerous business payments, you could apply for a business loan. Let’s say your business is already up and running and your requirement is limited to working capital. You would want to apply for a working capital loan. If you are a chartered accountant (CA), doctor or engineer, you could apply for a professional loan. Professional loans are special types of business loans and they each have their own advantage. You could even apply for a personal loan and use the loan amount for meeting your business requirement. Because all the above-mentioned loans are unsecured, they assume that you have a high credit score. What if your credit scores are low? If you have a property, you could explore the option of loan against property (LAP). Any of these loans can help you set up or expand your business.
Crowdfunding has its own set of the advantages and disadvantages. These include:
- You can reach more people through crowdfunding
- Your idea is backed by numerous people, thus giving you a reassurance
- A successful crowdfunding can attract investors and may be helpful for future funding
- A public display could lead to your idea getting copied
- If you miscalculate your product cost, you could lose out in a reward-based funding
- It would be some time before the liquidity would reach you
Loans have their pros and cons too. These include:
- There are numerous loan options to choose from
- They are faster and you could get liquidity within days if not hours
- You can still be the sole owner of your company
- You don’t have to share your profits
- They offer you tax benefits
- There is a chance that the banks may not sanction your entire amount depending on the type of loan and eligibility factor.
To sum it up
When it comes to funding, there are numerous options. However, you need to consider your business requirements before you finalize an option. Let’s say you are okay waiting, need huge sums, and are okay sharing profits with investors. Then, you can apply for crowdfunding. However, if you urgently require a limited amount with numerous repayment options, you can avail business loan.