What You Need to Know About Business Loans and Crowdfunding

Entrepreneurs today have more options to fund their ventures than they did several years ago. Business loans remain one of the most reliable ways to receive much-needed cash. There is also crowdfunding, which, when successful, can finance a business venture as well.

Business Lending vs. Crowdfunding

Business lending and crowdfunding each have its own sets of pros and cons, and an individual’s situation is usually what dictates whether one is better than the other. Business loans are secured through a lending institution and the money given is required to be paid back, generally with interest.

Crowdfunding is secured online. The entrepreneur pitches his or her idea, and people who are interested in seeing it succeed donate funds. The monies accumulated are the owner’s to keep, and he or she is not required to pay back those who invested in the venture.

Lending: The Bad and the Good

Business loans are oftentimes tough to secure. The lending institution will require that the business owner provide financial information via a detailed application and accompanying documents, and then wait to see if the funds will be awarded via a lengthy approval process. If the bank does approve the loan, the recipient must have collateral to back it up. Should the business owner default on the loan payments, the bank can take possession of that collateral.

The pros are that the money is secured on the bank’s side, as well, and the person taking out the loan is aware of the financial institution’s reputation. Many loans are backed by the federal government, particularly for small and minority-owned businesses, and the entrepreneur is able to request the dollar amount needed and receive it in full for use once the loan is approved.

Crowdfunding’s Bad and Good

Crowdfunding isn’t guaranteed. The person seeking funding for his or her business idea can request a dollar amount from the crowd, but it may never materialize. It can take months, if at all, for the money to come in, and the entrepreneur will not know the reputation of the people behind the donations, which can be uncomfortable.

The pros are obvious: Unlike with business loans, the business owner does not have to pay the money back, so there is no need for collateral nor will there be interest payments. The fees for crowdfunding tend to be nominal, with the sponsoring website taking a percentage of the total amount. Crowdfunding also gives people the opportunity to invest in something they are passionate about, even if it’s only a few dollars.