The first thing that pops out when one wants to set up a business is the capital. There are several options to fund your business and amongst the various options, the most preferred traditional option is getting a business loan. Other than a business loan, currently, one approach that is been heard often is crowdfunding. Crowdfunding is where a set of investors invest a little amount on a business and business loan is entrepreneurs can get financial assistance from banks.
Crowdfunding or business loan, both the approaches have their own pros and cons, but you much check whether it matches your requirements, like,
Working
While getting a business loan, entrepreneurs must provide certain documents to prove their eligibility along with the business plan while banks check the credit history and approve the loan. The borrower will get one-time credit which is supposed to be paid with the interest rates by the end of the tenure provided.
In Crowdfunding, entrepreneurs will pitch their ideas to investors through social media or crowdfunding platforms. Interested investors will invest some money in the business in exchange for profits or equity depending upon the business type.
Know about: What is Crowdfunding investment?
Finance amount
In the business loan, banks will decide the finance amount based on the applicant’s profile, business idea, and profits being generated, etc. whereas, in the crowdfunding, investors consider only the idea/product of the business and invest accordingly.
Interest rates
In a Business loan, banks charge some interest rates on the loan provided while on crowdfunding, investors don’t charge any interest rates on the investment made.
Repayment procedure
Loan holders have to pay the loan amount to the banks at the end of the tenure whereas, in crowdfunding, there is no particular repayment procedure as it is reward-based or equity-based platform. Entrepreneurs must fulfill the requirements of the investors like a share in the company, profits, etc. depending on the crowdfunding type.
Credit history
Banks do check the credit history of the applicant before approving the loan. As banks don’t want to take the risk, they determine the repayment capability and approve a loan. While in crowdfunding, investors don’t check the credit history of the business owner. All they check is the business plan that will generate some good returns on their investment.
Check: How to improve your credit score
When to go for a business loan?
- If you have an existing business that is at least one year old
- If you have a good credit history
- If you want money right away to grow your business
- If your business has good profits
- If your business can afford a new debt(if there any existing debts)
When to pick crowdfunding?
- Usually, banks provide loans for existing business, i.e. if your business must be at least 1 year old to get a business loan. If you need finance to set up a business, then crowdfunding can be chosen.
- If you have a bad credit history crowdfunding can be chosen
- If you don’t need finance instantly
- If your business will not be qualified for a loan
Maybe interested: Best Business ideas for expats in Dubai
At the end of the day, it totally depends on your business idea and goals of the entrepreneur. It is recommended to pick the right option after understanding the pros and cons. Business loan or crowdfunding, make sure you use the finance in the right way by learning the market needs and make a good profit out of it.
About the author
Nikitha is a Senior Analyst at MyMoneySouq.com. She has been writing about personal finance, credit cards, mortgage, and other personal finance products in the UAE. Her work on Mortgage loans has been featured by the GulfNews and other popular Financial Blogs in the UAE.
