Is Crowdfunding or Business Loans Right For Your Business?

Today, companies obtain vital startup capital in many ways. Business loans still serve entrepreneurs. However, a growing number of enterprises also seek crowd funding to attract seed money.

Business Loans

Private lenders who furnish business loans range from well-heeled capitalists who act as “angel investors” by furnishing personal capital to enterprises, usually in exchange for equity positions in the firm, to commercial lending institutions. Banks, insurance companies, franchises, business sellers and even government agencies such as the Small Business Administration, may offer partial or full financing packages to business applicants meeting the criteria they establish.

At a minimum, most business lenders expect applicants to furnish a well-researched business plan describing their business and its marketplace. Lenders prefer the assurance of knowing that an entrepreneur has considered competing products and explored market conditions and marketing issues thoroughly before embarking on a new venture. Usually, lenders also expect entrepreneurs to furnish a significant portion of starting capital.

For instance, a bank might issue a business loan to a person buying an existing business if the applicant can demonstrate both credit worthiness and the ability to pay a substantial downpayment. Usually, a conventional business lender expects loan recipients to pay off a business loan within three to seven years and to furnish a secured interest in business assets to safeguard the lender’s interests if the business fails.

Crowd Funding

By contrast, standards for crowd funding for a new business typically prove far more flexible. Entrepreneurs ideally obtain up to 100% or more of their requested starting capital from a number of project contributors in exchange for furnishing donors with public recognition or gifts of appreciation or, in some cases, volunteer opportunities.

Crowd funding does hold many negatives, since entrepreneurs do not always obtain the funding that they request from online audiences, despite sometimes investing in expensive promotional videos and other sales materials. Members of the public at some sites promise to support a project, but do not follow through with the anticipated monetary gift.

An Illustration

To illustrate the difference between these two forms of obtaining startup capital, just consider a film production: a talented video maker decides to prepare a documentary about widgets. The producer might prepare a script and a detailed budget and visit local banks seeking to raise the required capital to hire workers and equipment necessary to undertake the project.

At the same time, the producer might also consider going online to request donations from crowd funding donors through crowd funding Internet sites, which may (or may not) request a fee for publicizing the request online. In exchange for a small donation of a designated amount from 1000 different donors, the company might offer to reserve seats at the premier for contributors and to list their names in the film credits as sponsors. Essentially, the production company solicits financial assistance from private donors in this way to fund its project. Most crowd funders must prepare videos marketing their crowd funding campaign.

Legal Advice

To avoid legal concerns, talk to Austin’s premier business attorney, John McDuff, in advance of beginning a business. Neither conventional business financing nor crowd funding strategies offer guaranteed solutions for entrepreneurs seeking capital. Ultimately, a lot depends on the circumstances of the individual business, the abilities of entrepreneurs, and lender and crowd funding site requirements.