It’s tempting to jump on the crowdfunding bandwagon, but it isn’t for everyone nor is it all that it’s cracked up to be. Crowdfunding works for those who cannot secure business loans, but the process is sketchy at best, and there is no guarantee you’ll receive the funds you need. This is why many still rely upon the tried-and-true method of securing business financing through loans.
Crowdfunding Basics
Crowdfunding is business financing secured through a crowd of people. This type of funding is done online via websites designed for this purpose. If you were looking to finance your business venture through crowdfunding, you would put up an appeal for the amount of money you need and explain why you need it.
People who are interested in supporting your business will donate money to your crowdfund; the donation amounts vary widely. Once you receive the total dollar amount requested, the website will dispense the cash to you after taking a percentage of the funds itself. In some ways, this works a little like bank funding.
Crowdfunding Drawbacks
The major appeal of crowdfunding is that you don’t have to pay any money back. Unlike business loans, the people who provide the funds are gifting it to you, so there’s no application process and fees, no interest, and no collateral to back the loan. This might seem like a no-brainer, but it’s not. Crowdfunding comes with some drawbacks.
First of all, you can ask for as much money as you want, but you won’t necessarily receive it. You are already having to market your business idea to your potential customers; imagine having to market it for money. This is exactly what you will have to do if you crowdfund your startup; you will have to convince people to give you money.
You may hear of success stories where people received more cash than they ever imagined, but this is not always the case, and if you research it, you will see more crowdfunding ideas dead in the water than actually financed. The money might not ever come in, and if it does, it can take months, even years to receive the requested dollar amount.
Business Lending Security
Another drawback of crowdfunding is you do not know who is giving you money, and while this might not seem like a big deal at first, it’s better to secure financing from an institution backed by the federal government. Business loans are guaranteed, and the reputation of the lender is out in the open, giving you a sense of security you would not have from an anonymous financial source.
