Crowd Funding Or Business Loan: Which Is Better?

There are various ways to get the cash influx while starting or expanding a business. From bootstrapping to crowdfunding to bank loans, there is a multitude of business financing options to choose. But how do you find the right fit for your business?

Several factors act upon to take an informed decision about the source of your business financing. This article discusses the differences between crowdfunding and business loans and which is better for your business.

How Does Crowdfunding Work?

Crowdfunding enables you to raise funds from the public by conducting a campaign on the respective platforms. These platforms facilitate interaction between the founders of the business and potential investors, with the people.

Typically, the company offers rewards or equity in exchange for the funds. There are almost none to a few restrictions while raising funds from the crowd. However, it requires a massive marketing budget to make the campaign a success.

Crowdfunding for businesses can take a few weeks to a few months to close. Regarding the cost involved, a platform fee of 5% to 15% of the raised amount, plus a payment processing fee of 3% to 6%, may be charged. In equity-based crowdfunding, platform fee varies, and you lose an ownership stake in your business.

Most crowdfunding platforms operate on an all-or-nothing model. It means if you reach your target fund, you get the money. If you don’t, investors get their money back, and no amount is credited to the fundraising business.

How Does A Business Loan Work?

Business loans are a form of debt where the business borrows money from financial institutions and pays them back along with interest and fees in installments over a certain period.

Business loans are best for one-time expenses like business expansion, adding a piece of critical equipment, or a small project. A cash flow-positive business and an owner’s good credit score can act as favourable conditions to avail a win-win business loan terms.

The entire loan procedure can take less than a day if you apply online and fulfill all the necessary criteria. However, it can extend to three months if you apply with a bank with poor eligibility criteria.

The cost of a business loan can range from 4% to 99% APR depending on your credit score and business conditions.

Types Of Business Loans

Some of the most popular types of business loans include

1. Business Credit Cards:

Similar to a personal credit card, business credit cards have revolving lines of credit that you can use to fulfill your business needs as long as you pay a minimum monthly payment and don't exceed your credit limit. It is a popular option for recurring spending.

2. Equipment Loan:

This type of loan is allotted specifically for purchasing equipment for the business. The loan period depends on the expected useful life of the desired equipment. On the other hand, the interest rate depends on how well the equipment holds its value and how financially healthy the business is.

3. Factoring:

In high-risk industries like trucking, which rely highly on invoices, it may be easier to qualify for factoring. This includes selling unpaid invoices to factoring companies at discounted prices to access the outstanding money.

4. Grants:

Businesses with a social mission may be eligible for non-repayable business grants.

When Should You Consider A Business Loan Or A Crowdfund?

You can consider crowdfunding for your business when:

• Your business cannot qualify for a loan
• You need the initial fund for a great business idea
• Your business belongs to a high-risk industry
• You don’t require the funds immediately
• You have the resources to make a compelling and a potentially successful campaign

You can consider a business loan when:
• Your business is at least one year old
• Your business is profitable
• You have a good credit history
• You need funds fast
• Your business can afford to take more debt

Apply For A Business Loan With IIFL Finance

IIFL Finance is a leading instant business loan provider. We offer quick loans that are perfect for MSMEs with small financial requirements up to INR 30 lakh. You can check the business loan interest rate at your nearest IIFL Finance branch or online.

The entire process, from application to disbursement, is 100% online. The disbursals are quick and take 24-48 hours. You can fulfill various business needs and repay them per your preferred cycle. Apply for an IIFL Finance business loan today!

Frequently Asked Questions

Q.1: When should a business opt for crowdfunding?
Ans: Crowdfunding means raising funds from the public via a crowdfunding platform. This process can be lengthy and should only be an option if the fund demand is not immediate. You can also opt for crowdfunding if you do not qualify for a business and have the resources to make a compelling campaign.

Q.2: Why is a business loan a better option?
Ans: The betterment of a business loan depends on the situation. A business loan is better for those requiring immediate funding with a good credit history. It is also crucial for a business to be in a good financial position to repay the loan on time.