The world of Business finance has seen a rapid transformation in recent years. Today, there are as many as fifty financial products and services, catering to different sets and sub-sets of business loan seekers. These products have made it very difficult for a first-time loan seeker to pick and choose a financial vehicle that will enable growth for his/her enterprise. In today’s post, we are comparing two such financial products which offer funding to small businesses and startups i.e. crowdfunding and small business loans.
What is crowdfunding and how it works?
Crowd funding is a relatively new concept in the financial markets. In crowdfunding, a business venture gets funding through a series of small donations/pledges from multiple individuals/investors. In return, the business promises to deliver a niche product or equity share in the company. Crowdfunding is usually used by enterprising individuals to get money for their pet-projects. The money comes through crowdfunding platforms online, where people can list their idea or product which is under development. Interested individuals/investors donate the money using online payment options to fund the idea or project.
What are small business loans and how they work?
Business loans have remained an integral part of the banking system ever since its inception. However, the main focus of banks offering business loans has always been on large, commercial clients. As a result, small business owners had to rely on private money lenders and proxy financial help to get funding. The terms of these private business loans were quite exploitative to say the least. Enter non-banking financial companies, a new kind of financial institution that could offer RBI approved business loans to small and medium business owners.
The loans offered by NBFCs are customized for individual business needs and hence have terms that suit a small or medium enterprise’s financial capabilities. Hence, these loans are called small business loans.
Small business loans have a smaller ticket size and shorter repayment window than a traditional business loan. Generally, small business loans are also unsecured loans and hence are more attractive for SME owners who do not have substantial assets for collateral.
Crowdfunding vs. Small Business Loans
| Factors | Crowdfunding | Small Business Loan |
|---|---|---|
| Financial Vehicle Provider | An online platform where you can host your campaign for crowdfunding. | An online platform, like Lendingkart, where you can apply for a small business loan. |
| Probability of Finance | It totally depends on the idea/product that you are selling. If your idea/product appeals to the viewers you will be able to raise funds. But if there are not many takers for your proposition there will be little or no funding. | If you have a decent credit rating and proper tax records, and provide all the necessary documentation, there is a high chance that your loan application will be approved. |
| Application Process | Different crowdfunding platforms will have different terms and conditions for raising funds through their portal. | Create an online account, get a loan quote based on your financial information, accept the quote and upload documents for final verification. |
| Credit Requirement & Fulfilment | Since the amount of money, you receive, is totally dependent on the idea/product you promise to develop, the actual amount of money you will receive will also depend on the same. | You receive the promised amount after deduction of a processing fee by the lender. The ticket size for Lendingkart’s small business loans starts at ₹ 50,000 and goes all the way up to ₹ 1 crore. |
| Interest & Other Charges | Usually, the crowdfunding platform will charge a one-time percentage-based fee. | Lendingkart calculates interest rates through business analytics, promising the best interest rates for small business loans for every loan application. The processing fee is 1-2% depending on the principal amount. |
| Repayment Terms | There is no repayment involved in crowdfunding but you are required to fulfil the promises made in the campaign, such as developing the product or offering a share in the equity. | Small business loan repayments can be done in flexible EMIs – monthly or bi-weekly – when you apply with Lendingkart. There is no prepayment penalty or charge as well. |
Concluding Thoughts
As the success of a crowdfunding campaign depends entirely on the interest of individuals or investors, it is not a viable option of business finance for every SME borrower. A pro of the crowdfunding is that it allows you to gauge the market’s interest in your idea or product. But, that too requires a lot of upfront effort and may involve preliminary investment on your part. Thus, if the crowdfunding campaign fails, it becomes a loss of both time and money.
On the other hand, small business loans, especially from non-banking lending platforms like Lendingkart Finance, offer a much more reliable method of getting business finance for your budding enterprise. There are no cons as such to unsecured small business loans because they give you everything – from the required funding to lower interest rates and flexible repayment options – to make your business idea work.
To know more about Lendingkart’s small business loans in India,visit us at www.lendingkart.com.
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