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Reasons Why Crowdfunding Works Best for Small Businesses In today's business and marketing reality, crowdfunding is perceived as a powerful fundraising tool

By Baishali Mukherjee

Opinions expressed by Entrepreneur contributors are their own.

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Business loans have an allusion in Bible and are a time-tested phenomenon. It is as old as the concept of business itself. The concept of "crowdfunding', on the other hand, emerged in the late 1990s, as an idea of seeking funds online to sponsor events, while the term was officially coined by FundaVlog founder, Michael Sullivan in 2006.

Technology advancement and the boom in internet connectivity have now made it possible for businesses to explore diverse options for accessing capital. Earlier the sources of business loans were limited to banks, credit unions, other financial institutions, investors or family, and friends. But with the emergence of online loans and online financing, the methods of assessing and obtaining loans have become much easier for entrepreneurs.

Related : This is How Small business Owners are Making it Big with Crowdfunding

Crowdfunding debt is actually a peer-to-peer and social loan akin to traditional borrowing. One asks for funds with the assurance of paying back with interest over a definite time period. Today many avail crowdfunding for personal loans as well.

"When it comes to business borrowing, crowdfunding debts characteristically include borrowers who are in business, an online crowdfunding platform managing loan requests, a funding source, typically a hedge fund and individuals who invest knowing it's for loans to businesses," shared Aftab Malhotra, Co-Founder, Chief Revenue Officer and the Head of Product for GrowthEnabler, a virtual networking zone and mentoring hub for entrepreneurs.

Crowdfunding Debt is More Flexible

For business loans, interest has to be paid off interest over time, processing fees are decided by banks, the application process can take up to 3 months, the bank granting the loan may specify what loan can be used for and it is known to be best for traditional businesses.

In case of crowdfunding, payback terms are determined by individual websites or online platforms, lenders take a small percentage of funds raised as procession fees, application process depends on the campaign length laid down by platform used, Loan requirements require the borrower to notify his/her donors about the usage of funds. Crowdsourcing debts are best for minority-owned businesses.

Related : How Crowdfunding is Revolutionizing Investment in the Real Estate Sector

During 2008 and 2009, businesses raised more than $500 million as crowdsourcing with the help of online platforms like Indiegogo and Kickstarter. "With business lending becoming much rigid as a result of global recession, crowdsourcing is considered a boon for small businesses. With business loans interest-rates rising every day, crowdsourcing is successfully providing business-owners with a viable alternative for raising funds," notified Malhotra.

Crowdfunding Helps You Organise Your Campaign

Fundraising is a common concept in business today. However, before deciding on a mode of borrowing, it is important to understand the requirements of a particular business. "Traditional business loans are necessary to pay back the debt with interest over time, while crowdfunding, helps you organise your campaign either an equity or debt investment campaign. The latter is often known as crowdlending or peer-to-peer lending. Equity crowdfunding gives you the option to put up for sale some of your ownership in the company to acquire funds. You can also suggest some type of rewards to your donors, including the product you are selling," elaborated Ajay Mittal, founder, MeraWorkshop, an online discovery and booking platform dedicated to workshops and Kolkata Clean Air, a citizens' initiative with a vision to make Kolkata one of the most liveable and climate-friendly cities in the world.

Related : It's Not Just About Raising Funds, #5 More Aspects Of Crowdfunding

Marketing Knowledge

Banks ask for business plans to understand how your business model aims to create revenue in order to repay the loan. While a lot of forethought goes into a business plan it does not involve serious marketing savoir-faire. However, those opting for crowdfunding must demonstrate great marketing know-how. "Crowdfunding platforms often dismiss entire funding if the business fails to achieve its target. It is important to do the required homework in order to attract people to your crowdfunding campaign. There has to be an element of intrigue in the campaign," opined Umang Tewari, owner, The Big Fish Ventures.

Multiple Sources of Funding

In today's business and marketing reality, crowdfunding is perceived as a powerful fundraising tool. Traditional loans are fast getting more and more complex to obtain and women entrepreneurs along with minority-owned businesses continue to fight for achieving equitable access to funds. This has created an incredible demand for unconventional sources of funding and this has made crowdfunding a delectable choice.

"However, it sensible to not depend on crowdfunding as the sole source of obtaining funds. Businesses must explore other resources for financial support as well. Armed with numerous sources, you can create a financially stable model for your business and stay away from being exceedingly dependent on any particular source of investment," concluded Tewari.

Baishali Mukherjee

Former Freelancer

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