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When Is Crowdfunding Better than Taking out a Loan?

The concept of crowdfunding has become very popular in the last decade, with a growing number of businesses looking at this form of financing rather than going to the bank in order to get a business loan. However, allowing individuals to directly finance a business or the development of a product is not always a good idea.

Although there are several crowdfunding platforms to choose from, and most people know that they can find funding through them, nobody explains how much risk is involved using them, especially when it comes to using the money to start a business or to design a product from scratch. Here is what you need to know.

What Is Crowdfunding?

Crowdfunding, as a concept, refers to the ability of individuals or companies to seek financing directly from regular individuals. There are several platforms that offer this type of service and each of them has a different structure.

Generally speaking, an entrepreneur or a company can create an account with the platform, after which they will receive access to a page that will act as a portfolio/presentation platform. They can then present their idea on that page and set a monetary goal to start raising money. Other users can then contribute with various amounts of money towards that goal.

The money is deposited in the accounts of the platform and once the financial goal has been reached, the business or entrepreneur will gain access to the full amount. If, however, the goal is not reached, the money is returned to the users.

What Are the Pros of These Platforms?

The biggest advantage of using a crowdfunding platform is the fact that it is much easier to find financing, provided that the entrepreneur has an attractive presentation for the product.

Furthermore, it is a common practice for most companies to offer rewards to individuals who contribute to their financial goal.

Users that crowdfund the idea are usually only interested in the reward and do not care if the product will be successful or not.

It is also worth noting that these platforms are ideal for startups or individuals who simply want to create a product, for a limited time, and offer it to a specific audience.

What Are the Risks of Using Them?

Crowdfunding is great for individuals who want to develop niche products, as long as they have are actually able to deliver on their promises. In other words, entrepreneurs can find financing through crowdfunding platforms, but raising the required money often takes time and the product will die off if the product page is not constantly updated with information about how this are developing.

These platforms are well embedded in social media and companies need to constantly hype up their products in order to reach their financial goals. This means that work on the product must start before the financial goal has been met, which will require additional financing.

When Is It Better to Get a Business Loan from a Bank?

Banks are extremely cautious when giving out business loans. Unlike crowdfunding services, they require the borrowers to meet certain financial and operational standards before they approve a loan request.

However, as restrictive as banks may be, companies and entrepreneurs won’t have to wait for a financial goal to be met. If the business plan that they submit is in order and their product idea seems viable, the lender will give them the loan so that they can start production right away.

In a sense, business loans from banks are better because they are given out by business men who recongise investment opportunities, not by regular individuals over the internet. There is no social media component here, no need to create hype for the product or service.