Which one is better, Crowdfunding or Small Business Loan?
The financial sector has seen a rapid transformation in recent years. Today, there are as many as fifty financial products and services providing different sets and subsets of SME finance seekers. These products have made it very tough for a first-time loan seeker to pick and choose a financial service that will enable growth for his/her enterprise. In today’s post, we compare two such financial products that offer SME finance to startups and established companies — crowdfunding and small business loans.
What is crowdfunding?
Crowdfunding is comparatively a new concept in the financial market. In crowdfunding, a business enterprise gets funding through a series of small pledges from multiple individuals or investors. In return, the business guarantees to deliver a niche product or equity share in the company. Enterprising individuals usually use crowdfunding to get money for their peculiar projects. The money comes through crowdfunding platforms online, where people can list their idea or product under development. Interested individuals or investors provide the credit using online payment options to fund the project.
What are SME finance and how they work?
SME finance or loans have continued to be an integral part of the banking system ever since its beginning. However, the main focus of banks offering business loans has always been on large, commercial clients. As a result, small business owners had to rely on private money lenders and get funding to run their operations. Recently, NBFCs have come into the .play
The loans offered by NBFCs are customized for individual business needs and hence have terms that suit a small or medium enterprise’s financial capabilities. Therefore, these loans are called small business loans. Generally, small business loans are also unsecured loans and are more attractive for SME owners who do not have substantial collateral assets.
Crowdfunding vs. small business loan
In crowdfunding, companies can host their campaign on online platforms and attract investors. However, small business loans can be applied through banks and NBFCs. There is no hundred percent guarantee that you will get the fund in crowdfunding because it depends on the idea/product you are selling. But, if you have a decent credit rating and provide minimal documentation, there is a high chance that your loan application will be approved for a small business loan.
The terms and conditions for raising funds through crowdfunding portals are different. For business loans, create an online account, get a loan quote based on your financial information, accept the quote and upload documents for final verification. Companies like OfBusiness offer SME loans up to two crores. OfBusiness determines interest rates through business analytics, promising the best interest rates for small business loans for every loan application. Small business loan repayments can be made in flexible EMIs, and there is no prepayment penalty or charge. On the contrary, there is no repayment involved in crowdfunding, but you are required to fulfill the promises made in the campaign, such as developing the product or offering a share in the equity. In addition, usually the crowdfunding platform will charge a one-time percentage-based fee.
In Summary
As the success of a crowdfunding campaign depends solely on the interest of individuals or investors, it is not a viable option of business finance for every SME borrower. Crowdfunding definitely allows you to gauge the market’s interest in your idea or product. But, that too requires a lot of upfront effort and may involve preliminary investment on your part. Thus, if the crowdfunding campaign fails, it becomes a loss of both time and money.
On the other hand, small business loans, especially from non-banking lending platforms like OfBusiness, offer a much more reliable business finance method for your budding enterprise. There are no cons as such to unsecured small business loans because they give you everything — from the required funding to lower interest rates and flexible repayment options — to make your business idea work.