Crowdfunding has earned a lot of attention lately. According to one estimate, brands and individuals raised over $34 billion with crowdfunding sites in 2015. A number of new reports have been released to help people capitalize off of crowdfunding opportunities.
While crowdfunding can be highly effective for certain purposes, it isn’t a bulletproof way to raise capital. Here are some reasons traditional lending options are often preferable.
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Score More Financing than Crowdfunding
Crowdfunding is really only feasible for financing small scale projects. According to one analysis, the median crowdfunding campaign brought in a little over $40,000.
This may be sufficient for existing businesses seeking capital for a modest expansion or for very small scale organizations. However, it isn’t a reasonable funding option to meet the startup costs of most SMEs. It also won’t help growing businesses massively overhaul their infrastructure.
If you want to raise enough capital to launch a modest sized business or exponentially grow an existing company, you will need to seek a traditional loan or organize an IPO.
Avoid Ownership Interest of Uninformed Investors
If you watch Shark Tank, you know that many people pursue angel investors solely to get the mentoring of someone with an established track record in their field. The inverse can also be true. You don’t want to have many inexperienced investors giving their input on your company.
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This is often the issue when you organize a crowdfunding campaign. You may be selling shares of your company to thousands of investors. Keep in mind that many of these investors have almost no knowledge of your business. Many of them have never been involved in managing a business to begin with.
If you seek a loan from a traditional lender, you don’t have to worry about relinquishing ownership interest. If you go the IPO route, you still don’t have to worry about individual investors being overly invested in your company. Those investors will only be responsible for electing a board of directors, which will be mostly staffed by people that have the experience and knowledge to oversee the day-to-day operations.
Bypass Marketing Challenges
Too many people are overly optimistic about the virtues of crowdfunding. They believe that they can just launch a campaign and people will beat down their door to start pledging their money.
This very rarely happens. If you want to raise money through crowdfunding, you will need to spend at least 15 hours a week a week for a full month on marketing. You must convince thousands of people that your campaign is worth their hard earned money.
You don’t have to deal with this dilemma when you are seeking a traditional loan. Of course, there is still work involved, but the work will be mostly centered around things that you need to do anyways, such as writing a business plan and projecting future expenditures. Lenders that offer installment tribal loans don’t have the same hassles that crowdfunding provides.
Don’t Jump on the Crowdfunding Bandwagon Just Yet
Crowdfunding can definitely be a great way to raise money, but it is far from a sure thing. Crowdfunding campaigns require a massive amount of work and even then they still fail. If you are seeking capital to launch or grow a startup, there are much better ways to go about it.