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Crowdfunding vs. Small Business Loan

By Ephrat Livni, Esq. | Last updated on

Everyone seems to be asking for money to make their dreams come true, so why shouldn't you? Your aunt is crowdfunding her feature film and your nephew's collecting cash for an album.

Now you are thinking you'd like to do the same, generating capital for your small business through one of the many crowdfunding apps in existence. Let's take a look at some key characteristics of a successful crowdfunding project, some risks, and how it all compares to the traditional business loan.

Hot Projects Only

Whether your crowdfunding campaign will succeed depends on a number of things. Most notably you must ask yourself whether you can sell people on your business idea and get them to invest in something that does not yet exist. You need an idea that people can get behind and want to be part of, you need investor incentives, and you need some marketing abilities.

Of course, one way to view the crowdfunding experiment is as a litmus test for your business. If you aren't motivated to market at the beginning, you may not get more motivated with time.

Keep in mind too that a successful crowdfunding campaign has a lot to do with how supportive your friends and family are and how wide a net you can cast when asking for funds. If you come from a bashful clan that shirks Facebook and never forwards mail, then your campaign may fail simply because you are functioning in an online vacuum.

Finally, make sure you do a lot of research before deciding where to launch your campaign. Kickstarter, which is perhaps the best known crowdfunding application, is an all or nothing endeavor. If you can't raise the amount stated in the goals, you collect none of the funds people offered to invest. Not all applications work the same way.

Bank Loans

Getting a bank loan can start to look really attractive when you consider all of the work you have to do to raise funds online. But there are certain serious drawbacks. To qualify for a small business loan you will need good credit and to subject yourself to rigorous review by a financial institution.

Some kinds of businesses require a great deal of outlay while others require a lot less. The decision to seek funding from a bank or the "crowds" online should rest on the specifics of the business you wish to open, your contacts, your marketing confidence, and your sense of adventure.

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