BUSINESS LOAN VS CROWDFUNDING

Introduction

Small- and medium-sized enterprises (SMEs), which employ under 250 people, ensure that countless products and services are available in every corner of Ireland. As such, SMEs are the backbone of the Irish economy. Yet many financial institutions don’t seem to recognise their importance or make allowances for the endless challenges SMEs must overcome to survive and thrive.

GRID Finance is different. We see our role as enablers, streamlining at least some of the financial challenges facing SMEs. For this reason, GRID Finance offers business funding options designed with Irish business realities in mind.

In this article, we’ll compare what GRID Finance offers to standard Business Loans, and also to Crowdfunding, an option that’s become increasingly popular in recent years.

Which of these financing choices might be right for your business? Read on for a deep dive into this critical subject…

Understanding Business Loans

A Business Loan may seem like the natural option if a business needs a cash injection for any reason – and it may be the right one in some circumstances.

But before deciding on this step, it’s worth reviewing the key features of Business Loans, plus their advantages and disadvantages.

What is a Business Loan?

Whether to enable growth, overcome temporary cash flow shortages or take advantages of unexpected opportunities, businesses always need capital. The ideal scenario is to dip into cash reserves when funds are required. But if this isn’t possible, most businesses will consider applying to a bank or other financial institution for a Business Loan.

The usual options are either ‘secured’ or ‘unsecured’ loans. Generally, interest rates on secured loans are lower because lenders can seize assets like property or equipment, if the loan isn’t repaid in full.

If the borrower doesn’t want to put assets at risk (or can’t offer any as collateral), they can opt for an unsecured loan. However, this can be a more expensive option because lenders generally charge higher rates due to the greater risk they face if the borrower defaults.

Pros and cons of Business Loans

When an SME needs funding, Business Loans can be a relatively simple and quick-to-arrange option. Saying this, they do have some drawbacks – for example, the cost of variable rate repayments can increase in line with rising interest rates. In the last few years, central banks have raised rates to combat inflation and while these have fallen recently, there’s no guarantee they will remain stable.

Failing to make repayments could also negatively affect your business’s credit score and harm your ability to secure future funding. Defaulting on a secured loan can also mean losing any assets offered as collateral. All in all, while Business Loans can seem like a straightforward option, their possible downsides should be considered before making any decisions.

Exploring Crowdfunding

While Crowdfunding may seem like a modern concept, it has been around in some form or other for centuries. For example, renowned Irish author Jonathan Swift sought subscriptions from supporters before publishing at least one of his books. Let’s examine how Crowdfunding works today…

What is Crowdfunding?

Crowdfunding generally occurs online on platforms such as Kickstarter, GoFundMe and Indiegogo. These enable contributions to be raised from a large number of people located anywhere.

While this type of financing can be used to help finance businesses or startups (Crowdfunding is often used by entrepreneurs aiming to turn an idea into reality), it can also help good causes, creative projects and even pay for medical treatment.

There are four broad Crowdfunding models: donation-based (where no return is expected), reward-based (funders receive perks), equity-based (investors become part-owners), or debt-based (funds are repaid with interest).

Pros and cons of Crowdfunding

Crowdfunding has been described as a means of democratising fundraising. While this sounds very positive, there are some weaknesses. But looking first at the positives, Crowdfunding imposes no barriers to borrowing (such as credit histories), it can be arranged quickly, it can be used as a marketing tool to connect with potential customers, and it can also prompt feedback and good ideas.

On the other hand, Crowdfunding can be costly, risky and offers no guarantees of a positive outcome. Kickstarter’s success rate is only around 40% and platforms can charge fees of between 5% and 10% of any

funds raised. Backers may also look for equity which could affect how the business is controlled in future. Finally, sharing ideas publicly gives competitors an opportunity to copy them.

Comparative Analysis: Business Loan vs Crowdfunding

Having looked at their key features, comparing Business Loans and Crowdfunding will help identify the best option for your business and its unique challenges.

Key Differences

There are some very clear differences between Crowdfunding and standard Business Loans. A traditional loan means dealing with a single lender who will generally demand to see a credit history and expect regular repayments, no matter how your business is performing.

Business Loans also come with a high degree of certainty; if a lender approves an application, borrowers can expect to receive funds on the agreed date. With a fixed rate loan, it’s also clear exactly how much has to be repaid regularly.

None of this is true of Crowdfunding. If the campaign is successful, contributions could be received from hundreds of backers. These may then look for a payback in the form of rewards, perks, interest or even equity – it all depends on what they were initially promised.

Of course, there is no guarantee that the amount needed will even be raised, no matter how much effort is put into the Crowdfunding campaign.

Scenarios where each option is suitable

Crowdfunding is often resorted to when the outcome is uncertain, or there’s less of a commercial motivation. For example, creative or community projects (such as making a film or opening a local café), or even personal needs such as medical treatment, can be crowdfunded. In a business environment, a Crowdfunding campaign is often focussed on getting new ideas off the ground rather than assisting an existing business.

On the other hand, Business Loans are generally used by established businesses with a trading record and reasonable credit history.

Here, the business may need funding to expand its premises, purchase inventory, upgrade equipment or simply plug a gap during a temporary cash flow reduction.

Financial considerations

Although other factors such as equity ownership come into the picture with Crowdfunding, the short- and long-term financial impact on a business is the most important consideration when deciding on a source of funding.

Impact on cash flow and ownership

While both options provide a cash injection, Crowdfunding and Business Loans affect a business’s cash flow and ownership differently.

A successful Crowdfunding campaign should have a positive impact on cash flow as there’s generally no obligation to repay immediately. In the long term however, backers may demand rewards, a share in future profits or even equity. Obviously, these obligations could have a significant influence on the business’s ownership.

On the other hand, the fixed repayments demanded by Business Loans will have an immediate impact on cash flow. No matter how the business is currently performing, it must set aside money for monthly payments.

While this can create financial pressures, Business Loan lenders won’t claim a share of ownership in the business or expect to have a say in its management.

Repayment Terms and Fundraising Requirements

As the repayment terms demanded by Crowdfunding and Business Loans are dissimilar, they will naturally have a different impact on the business.

With a Business Loan, terms are generally very clear-cut with regular fixed repayments required until the loan is fully paid off. The terms associated with Crowdfunding tend to be looser and can change from project to project. For example, one Crowdfunding campaign may simply offer backers rewards such as lifetime subscriptions or memberships while another may promise an ownership stake.

Similarly, the steps required to raise money also differ greatly. Applying for a Business Loan from a bank or other financial institution is usually relatively simple.

In contrast, Crowdfunding can involve creating a compelling pitch, ongoing promotion, and adhering to the Crowdfunding platform’s requirements – including paying their fees.

How to choose what’s best for your business

After reviewing the key features of Business Loans and Crowdfunding, let’s move the focus to your business. In this section, we look at what you must keep in mind before deciding on a source of funding.

Always remember that this is an important decision which could have a long-term impact on your business.

Assessing your business’s financial health and goals

Your business’s existing financial circumstances and long-term objectives will dictate which is the most suitable funding option. A detailed review of key metrics including income streams, liquidity ratios, debt levels, assets, liabilities, and profit margins will shine a light on your business’s current health and long-term sustainability.

Looking ahead, you’ll also need to consider growth projections, your willingness to share ownership, probable market conditions, in addition to your overall attitude to risk.

When to choose GRID Finance products

Obviously, there will be times when Crowdfunding is suitable. But on other occasions, GRID Finance can offer your business a far better funding option.

If you want simplicity and flexibility, GRID Finance’s Flexible Repayment Funding could be the perfect fit. With this solution, you can access up to €500,000 and make repayments based on a percentage of your average weekly sales.

This means repayments decrease during quieter periods and increase as sales grow. Consequently, your cash flow won’t face unwelcome extra pressures if business slows down.

Application process and requirements

If your business is registered in the Republic of Ireland, can show a trading record of nine months or more and takes revenues via card machines or an online payments processor, you can apply for GRID Business Funding of between €10,000 and €250,000. Here are the steps to take:

Steps to apply for a Business Loan

When applying for GRID Finance business funding, first open a GRID account online here, and upload six months of recent bank statements (or a read-only Open Banking Connection) plus a valid tax clearance certificate.

Preparing for a Crowdfunding Campaign

A successful Crowdfunding campaign will take time and effort. In particular, you need to create a compelling pitch that explains your goals and the incentives (if any) you will offer contributors. At this point, it’s wise to get feedback on how persuasive your pitch is and make changes, if necessary.

To attract attention and maximise the amount you raise, you should also design graphics and, ideally, make some videos that can tell your story clearly and compellingly on social media.

Once you have created your campaign assets, then choose your preferred Crowdfunding platform and set a realistic timeline. With all of this in place, you should be set to launch your Crowdfunding campaign.

Conclusion

For any SME seeking a funding solution, it’s clear that Business Loans and Crowdfunding are radically different options. A standard loan is a straightforward proposition: you apply to a single lender and, if successful, you receive the funds and make regular repayments whether trade is quiet or booming.

As its name suggests, Crowdfunding connects you with multiple lenders all of whom must be persuaded that you are worth investing in.

GRID Finance offers SMEs a third option: a way to access cash which combines simplicity with an understanding of the everyday pressures that confront businesses in Ireland. Trading cycles aren’t always fixed and predictable, so why should businesses be locked into rigid repayment schedules?

With GRID Finance, you’re not – and that’s what makes this such an attractive way to raise money whenever your business needs it.

Let us help you get started on your funding journey – apply for funding today.