One of the most important business decisions you make will be the one that will be made before your business even opens. Settling on a funding source for your business can be a long, hard process, but it is necessary to choose the right one not only for your business but also for yourself.
There are many types of funding options, but crowdfunding and traditional funding are one of the most popular ones. Choosing the right one will ensure you get the right funding your business needs to start and reach the growth it needs. To decide which one to choose, you need to look at both the options.
In this article, you will learn the pros and cons of crowdfunding and traditional funding to help you decide which is best for yourself and your business.
What is Crowdfunding?
Crowdfunding is not a new concept. It is a process of gathering funds from an assorted crowd that may be interested in your project. The solicitation of funds from large groups of people is exactly what nonprofits and political campaigns have been doing for as many years. In today’s world, though, the internet has altered the ability for companies and individuals to get their ideas in front of large numbers of strangers with money to invest. The target is large and you may have to appeal to them at once.
How it Works
Social media has often helped these campaigns, and a contributor can “share” the story on their Facebook, Twitter, Instagram, or other accounts for all of their friends to see. A popular example of social media crowdfunding is Kickstarter, a site that is dedicated to helping fund independent musicians, filmmakers, writers, and artists. In exchange for a certain monetary donation to one of the artists, the reward is usually an advance copy of a DVD, concert tickets, or a signed thank-you note. While it does not seem like much for a donation of a few hundred dollars, it does show that the receivers appreciate the donation.
The problem with the Crowdfunding
The main problem with crowdfunding sources is that if a new business owner does not have anything to convince anyone of their business other than a short video or written paragraph, they may lose the skills to convince customers down the road. A large share of crowdfunded investments will never make money and investors will be out-of-luck. While small, fragmented investments limit the significant risk to any single investor, too many failures will give crowdfunding a bad rap and prompt regulatory tightening. Currently, there is no large-scale regulation, so most anyone can come up with an idea and get the funds online to make their dreams come true. There is also the small risk of scammers taking advantage of crowdfunding, as it is not regulated. While the vast majority of users are legitimate in their ideas (no matter how crazy they may seem), a select few can easily come in, take money, and ruin the party for everyone.
Traditional Funding
Traditional funding sources include loans from banks, financial institutions, grants, angel investors, venture capitalists, SBA and more. These types of funding are very common in developing new businesses. Finding the investors is a straightforward process- you pitch the ideas and convince them how profitable it is. If it really is an effective business plan then you will have no problem getting the fund.
Benefits of Traditional Funding
One of the biggest benefits of traditional investors is located in their brains, not in their wallets. Traditional investors are skilled at knowing how to make a brand, be it a product or person, and succeed because they have their names and reputations attached to the product just as the business owner does. Most investors do not throw money at just the coolest ideas, but rather invest in entrepreneurs with businesses they understand and can help push in the right direction.
The Problems with Traditional Funding
Securing a traditional funding source can be a difficult process due to accounting and legal costs. These sources also come with stipulations and restrictions in the composition of the management team, employee salary, and other factors. In addition, with the source literally invested in the company’s success, all business operations will be under constant scrutiny. The loss of control varies depending on the terms of the deal.
Which one is for you?
How you choose to fund your company’s start-up is a difficult decision, as well as a decision that should be well thought out. There are many differences between crowdfunding and traditional funding sources, but there is one similarity: both attract people who care about what you represent, and both want you to succeed. The rest of the pros and cons are up to you, the business owner, to decide what is important and what is not.