Which One is Better, Crowdfunding or Small Business Loan?

What is crowdfunding?

Crowdfunding is an advanced and very new process that has come into the markets of finance very recently. The crowdfunding method involves a business venture funded through a small series of donations or pledges from various investors or individual organizations.

Instead of taking back the money from the business owner, the investor takes back the amount from the business owner in the form of their specialized product according to the invested amount.

The business owner keeps on supplying their made goods to the investor, which is how he gets rid of the debt taken from the investor. Sometimes, they can also return the investor his money by giving him an equal share of the company.

Crowdfunding is generally very different from general loans. An individual invests an amount of money in a small company and returns either demand an equal share of the company or takes his invested capital back by getting supplies of the funded company’s niche products. Small enterprises or individuals mainly use crowdfunding to obtain money for other sub-projects.

The cash for crowdfunding generally comes from online social media platforms. The investors post their ideas of investment online. Their ideas are primarily ones that are under development. They provide several payment options online, and individuals who are interested donate the money accordingly. They are interested in their ideas and think that it can be of profit to them.

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What is a small business loan?

Unlike crowdfunding, a business loan is an age-old process of money investing or taking money for establishing a company. It has been prevalent ever since the banking system came into force. Banks generally do not invest in small companies. Their target of giving out business loans is generally to renowned commercial clients. The crowdfunding process came into work because the banks only give out loans to already established businesses.

The small business owners had to take up loans from the public or strategize something from elsewhere. The small business loans are approved by RBIs which reduces the risk of fraud. You can also customize your loans according to your convenience when you take up a business loan from a bank. Repaying them becomes more accessible as they provide you with a more significant period to repay them and a lesser amount of money every installment as per your profit acquiring.

Why is a small business loan better than crowdfunding?

The probability of getting a crowdfunding campaign successfully executed depends on how attractive their bussing ideas are and whether or not it attracts investors. If no investor is interested in their business concept, they will have no investment to carry their business forward. This is also why not every SME borrower can obtain a portion of business finance from crowdfunding.

An advantage of crowdfunding is that it allows you to consider the market’s interest in your business idea or the type of product you wish to sell. But when it comes to crowdfunding, it requires additional effort, which is very engaging and time-consuming. Sometimes in crowdfunding, you also need to make prior investments to succeed in the crowdfunding process.

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When it comes to a small business loan or MSME loan, platforms like Ziploan and other similar ones provide the customers with a lot more security and a lot less investment than crowdfunding. It is a more reliable form of getting money for your business when compared to crowdfunding for obtaining finance for your business for any of your new business establishments.

There are generally no drawbacks of taking a small loan from a bank, for they provide you with a proper manual for everything, and they also mention all the steps required to be followed. Taking a loan from a bank is much safer because it is a legalized process.

It also reduces the risk of giving too much in return to the investors, for the transaction is entirely monetary. Banks also give out very flexible ways of paying back your money at your convenience, making the process of repayment easier. It also reduces interest rates, making it easier for you to repay them. Sometimes they also take the money back in smaller installments, making the payment easier according to your profit rates.