Every small business owner faces the challenge of funding. Getting your hands on cash is close to impossible. Lenders are not very willing to infuse capital into a business without a guarantee that the business will be able to repay the loan. Bank loans have been the go-to source of capital for small businesses since time immemorial, but things are changing. It is becoming harder to get approved for a bank loan nowadays. Thanks to advancement in technology and internet use, small businesses now have other ways of accessing capital to expand their businesses. As long as you have basic knowledge about tech, it is easy to fundraise through online platforms. By now, most entrepreneurs have heard about crowdfunding, as an alternative to bank loans. Let us compare bank loans with crowdfunding.
Taking bank loans is a traditional approach whereby small businesses make use of financial institutions to request for capital. Some of the pros and cons of bank loan include the following.
Accessibility And Convenience
Bank loans are accessible since banks pool funds together, from customers’ deposits. They always have funds due to regular deposits by customers. Furthermore, It is convenient for you if you have been a frequent customer to that bank. Most banks offer loans to their loyal customers.
Non Profit Sharing
Banks only care about the interest they charge on the loan and repayment of the principal amount. They do not care about your profits or owning part of the company in exchange. This way, you can retain all the profits.
Securing a bank loan requires that the business offers collateral in exchange. Most small companies and startups do not have any assets to use as collateral. The issue of documentation also limits the uptake of bank loans. Most banks will ask that you provide documents such as the business plan, financial statements, a down payment which have to be approved. Approval may take up to 6 months, and this is a lot of precious time wasted, on the side of the business owner.
Banks expect that the borrower adheres to the repayment schedule without fail. Defaulting may have a significant impact on the borrower’s future credibility and credit score. Taking a loan is risky if your business fails to produce good results, as it creates a massive burden on the business owner. Furthermore, banks tend to charge a hefty penalty for early repayment of the loan, and this is a loss to the borrower.
Crowdfunding involves social lending such that a small business owner asks a number of people to each loan them some small amount of money, creating a large pool of capital in the end. It is done through online platforms.
Application for crowdfunding is not complicated. The business owner is required to set up a campaign on a crowdfunding platform of their choice. They then market their product to the clientele. The aim is to raise sufficient funds from the public in exchange for some reward or equity. The campaign period is not as long as a bank loan application period. As soon as the business owner reaches or exceeds their fundraising goal, you are good to go. Furthermore, the campaign is a marketing strategy for your product. If many folks like what you are offering, the demand for your product or service increases, and this is a win on your side.
Little Financial Risk
Crowdfunding allows you to test the waters and see whether your idea is viable. Once you put it out there, you can get feedback from your customers, and this will guide you as to whether you should proceed with your business plans or not. It saves you a lot of money which you would have used to purchase inventory, materials and do research. You would rather fund a proven and viable business idea that customers approve, as opposed to funding an unproven business idea.
Creating a successful campaign requires a lot of time, money and effort to write compelling content, build a functional prototype and market the idea. The downside of this is that the campaign may still be unsuccessful after you have spent so much money. Furthermore, there is a high risk of someone stealing your idea if you have not patented it. Even if your idea is unique, someone may still try to copy some of the concepts to build a better idea.
~ Another way to get an infusion of capital is to consider merging with a larger company, though you don’t want to do that without professional help. For Mergers and Acquisitions advice, please consider Tampa Business Broker, Dave DeCamella, who has over 9 years of experience as a business broker and over his career in commercial and residential real estate sold over $100 million of real property.
Small business can only expand and compete effectively with rival companies if they have a reliable source of funding. A small business owner has to weigh the pros and cons of bank loans and crowdfunding and make a decision on which route to take. You must be willing to risk something for you to get results in return.