The entrepreneurs nowadays have option to obtain money to set up, run, and expand businesses through a variety of loan products. Some of these small business loan products are conventional, whereas others are modern and technology driven. Many enterprises prefer availing credit through conventional small business loan products like term loans, line of credit, letter of credit, and working capital loans. At the same time, many entrepreneurs nowadays opt for technology-driven financial solutions like crowdfunding.
Unlike conventional business loan products, crowdfunding enables entrepreneurs to avail credit from multiple lenders by leveraging the internet. Each of the lenders provide smaller amount of credit to set up and grow small businesses. However, small business loans and crowdfunding differ from each other in a number of aspects. The entrepreneurs must understand the major differences between crowdfunding vs. small business loans to decide the most appropriate business financing option.
Understanding Major Differences between Crowdfunding vs. Small Business Loans
Number of Lenders
The entrepreneurs have option to choose from a wide range of business loan products provided by banks and non-banking financial companies. But they have to apply for the specific business loan product to a single lending institution. On the other hand, crowdfunding enables entrepreneurs to receive funding from multiple lenders. They have to launch a robust campaign through crowdfunding platforms to attract avail funds from individual lenders and group of lenders.
Loan Application and Disbursement Process
Normally, nationalized and commercial banks require borrowers the duly filled in small business loan applications along with the required documents. But many NBFCs nowadays allow entrepreneurs to apply for the business loan through their websites. They even leverage latest financial technologies to disburse term loans within 48 hours. But crowdfunding requires business owners to launch an aggressive campaign through an online crowdfunding platform to attract investors. The rules and guidelines for the campaign differ from one crowdfunding platform to another.
The eligibility criteria and credit requirements for individual business loan products differ. But no lending institution provides business loans to borrowers who do not have good credit scores. The entrepreneur must have a good credit score and the business must have a clean credit score to avail credit from lending institutions. In one of our previous articles, we had mentioned about how to maintain and improve quality score. On the other hand, the investors funding projects through crowdfunding platforms do not check the entrepreneur’s personal credit score or business’s credit history. The businesses with no credit history can also avail funding through crowdfunding platforms.
Cost of Credit
The terms of lending and rate of interest differs from one business loan product to another. The lenders calculate cost of lending based on a number of factors. Hence, the cost of credit varies according to the specific business loan product and individual borrower. The crowdfunding platforms normally require small business owners to pay a percentage-based fee to launch campaigns. But the borrower is required to pay the fee only once. Also, they are not required to pay any interest on the funds availed through crowdfunding platforms.
While processing and disbursing a business loan application, the lending institutions do not make disclose information about the business idea or project to outsiders. Hence, the entrepreneurs can keep their innovative business ideas private by opting for conventional small business loans. On the other hand, crowdfunding platforms require entrepreneurs to make their project information and business ideas public to attract investors. The entrepreneurs cannot avail funds through crowdfunding without sharing detailed information about the project.
The entrepreneurs must meet the business loan eligibility criteria set by the lending institution to avail a specific business loan product. But none of the business loan products require the borrowers to offer equity to the lender or sacrifice a part of profit. On the other hand, crowdfunding helps entrepreneurs to raise more funds for starting or expanding their businesses. They can even leverage crowdfunding as a marketing tool to create hype about their businesses and attract additional investors.
Often entrepreneurs find it difficult to avail conventional business loans on time. Despite meeting the eligibility criteria for the business loan product, they have to deal with lengthy and complex loan disbursement process. Unlike conventional business loans, crowdfunding helps entrepreneurs to avail more credit without any hassle or delay. But the entrepreneurs have to exchange equities to avail credit from multiple investors. Also, they have to focus on branding and leverage latest technologies to attract and impress prospective investors.
On the whole, an entrepreneur can avail credit to start and grow business through both conventional business loans and crowdfunding. They option to choose from a wide range of small business loan products. Likewise, they can opt for crowdfunding to attract multiple investors. Many entrepreneurs nowadays opt for crowdfunding to access credit easily and timely. But the entrepreneurs must keep in mind the benefits and pitfalls of both crowdfunding and small business loans to decide the right business financing solution.