For anyone who is going to start a new business in 2021, you must be careful while choosing financing options. If you are confused about Crowdfunding or business loans, which option is best, read this article to know the pros and cons of both methods.
Both crowdfunding and business loans are equally popular among entrepreneurs and solopreneurs. But, both come with some flaws. Therefore, it is essential to evaluate both benefits and potential drawbacks before deciding the most suitable option.
Crowdfunding or business loan?
We all know about how business loans work. But, Crowdfunding may be the new term for many people.
What is Crowdfunding?
Crowdfunding is a specially designed finance raising method for startups or entrepreneurs because you do not need to make regular repayments compared to business loans. If you are young and new to the business world, playing will money can be a little risky. And, majority of Crowdfunding operates as an equity-based and reward-based scheme. So, with Crowdfunding, you can even repay your investors with the finished product you are making or simply by giving away equity in your business.
How does Crowdfunding work?
It is the process in which fund is raised for project or business by collecting money from many investors as donations or pledges. Later, you can repay investors either with equity or one of the products in your business as promised. It has become more popular among entrepreneurs because of the ease of fundraising.
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Crowdfunding or business loans – pros and cons
Pros and cons of Crowdfunding
Its success depends on how to pitch your ideas among investors. If they do not find your idea interesting and strong, then you won’t get the money. Similarly, it requires a lot of effort, dedication and works from your side. However, there is an equal chance of not getting any investors.
Therefore, you should have solid and multi-faced market planning to get the funds from Crowdfunding.
Besides, it saves you from higher interest rates and loan traps like in business loans. Also, you can access the impact of your business in the market before actually launching it with Crowdfunding. Therefore, it can help you save time and money on a weak business plan.
Pros and cons of business loans
Without comparing two sides- Crowdfunding or business loans, it is hard to say anything.
You can have full ownership of your business; you do not have to share equity-like in Crowdfunding after total payments of loans. Similarly, timely payment can increase the credibility of your business.
Besides, loan procedures can be hectic due to multi-step paperwork, strict requirements and criteria for approval. And, there is a risk of not repaying interest in time if the business does not go as planned.
Crowdfunding or business loans – comparison
If you are still confused about which is best for you – Crowdfunding or business loans; let’s have a side-by-side comparison of both.
| Parameters | crowdfunding | Business loan |
|
Application and approval difficulty level |
It is a much faster process than business loans. However, funding criteria and requirements can vary according to the platform. If your idea gets approved, then only you can raise funds from different investors.
|
Approval can be difficult and lengthy as you have to submit financial statements, credit scores and business plans to the banks. After reviewing and meeting all criteria, you can only get a loan, and it can take 2-3 months.
|
| Credit score | No credit requirements or limit set.
|
You need to maintain good personal as well as business credit scores.
|
| Financing means | Usually banks or online lender. | Money comes from several individuals before that you need to issue your campaign to crowdfunding platforms. |
| Funds repayments option | Monthly payments of interest, including some principal until complete payment.
|
Do not have to repay payments, but have to provide as promised before to the investors.
|
| Fees and interest | You have to pay a certain amount of interest regularly on total loan money.
|
One time payments depend on the percentage of fees of each investor.
|
Summing all up:
Hope, the article helped select either Crowdfunding or business loans after knowing the pros and cons of both.
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