Why a Commercial Loan is Better than Crowdfunding
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UPDATED: Oct 25, 2012
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Crowdfunding has blitzed onto the lending scene. A myriad of online websites now exist for budding entrepreneurs to pitch their vision to various investors who then pool their money into a loan—hence the “crowd” in crowdfunding.
Lately, news about commercial loan has heralded the rise of online financing innovations, such as merchant cash advances and crowdfunding. Despite how flashy and innovative new methods of financing may be, they are not necessarily the best choice for borrowers. Opting for a traditional commercial loan from a credit union or bank may be the wisest choice for borrowers looking to start or expand a business.
There are several reasons why commercial loans can be better than money borrowed via crowdfunding.
When commercial loan borrowers seek financing, they typically first contact and establish relationships with a bank or credit union lender. These relationships grow with time, as many banks offer valuable advice to their borrowers. Likewise, the resources offered by banks far outweigh those of crowdfunding websites since banks tend to be very experienced with commercial lending. Depending on the growth potential of a business, a bank can be willing to lend money over several decades. With the relatively new crowdfunding websites on the scene, and the ever-shifting pool of investors, any budding relationships are tenuous at best.
Crowdfunding is surely an excellent way for some businesses and artists to obtain funding, provided they don’t need much funding to begin with.
Due to current legal restrictions, crowdfunding can only provide up to $1 million in financing in a 12 month period. However, commercial loans are as limited—or unlimited—as the available reserves of a lender.
Entrepreneurs or businesspersons that have massive visions requiring millions in startup capital will find that commercial loans—or the lottery—are their only means of funding.
Artists and Silicon Valley type-startups touting the latest social media site or app may be enamored by crowdfunding, but this “open source” funding method lacks the prestige of commercial loans.
Obtaining a business loan from a bank or credit union lends credibility and a veritable stamp of approval in the eyes of other businesses and lenders.
Prospective borrowers, such as lawyers looking to open a law office or medical professionals in need of starting a practice, are wise to shy away from being crowdfunded by a nebulous collective of investors.
Crowdfunding certainly has a lower barrier to entry when compared to commercial loans. In essence, a few images, a webcam recording, and a handful of paragraphs are all that is needed to garner attention and money on some crowdfunding sites.
In contrast to this, a commercial loan application requires extensive submittal materials, some of which include a business plan, corporate financial documents, information on staff, sales projections, and other detailed data. While these requirements sound costly, they can help refine a business before it is even launched, as opposed to approaching investors with a haphazard proposal. Whether a businessperson obtains financing via crowdfunding or a conventional business loan, only a strong plan and due diligence will lead a business to success. Having detailed data, as required by a commercial loan, is the surest sign that a business is up to par and up to the task of achieving profitability.
While these reasons highlight the many ways that commercial loans are more beneficial than crowdfunding that does not mean that crowdfunding isn’t the right choice for some businesses and entrepreneurs. As online financing innovation continues to evolve, a time may come when a refined form of crowdfunding becomes the ideal choice for commercial lending. Until that time though, borrowers should be inclined to evaluate their options before borrowing and landing themselves in debt through what may be the wrong lender.