The Pros and Cons of Crowdfunding for Business

April 20, 2020 Off By studyshout

Funding is the most essential part of any business organization. No matter whether you are a small or large business owner, you need finance to manage day to day tasks of your business. Without sufficient finance, it would be difficult to manage the routine activities of the business.

When a business has funds available, its growth and expansion get easier. With good enough funds available, the business owner can try new activities for business expansion.

Not all businesses out there have enough funding available to work on business growth and expansion. This is when the importance of financing comes in. There are different ways of getting funds for the business. Some of the popular ways are self-funding, funding from family & friends, bank loans, equity capital, etc.

At present, a new funding source is gaining popularity – crowdfunding. Crowdfunding is the process of raising funds for a particular project or venture by raising funds from a large number of people. No matter which funding source you choose for your business, each of them has its own pros and cons.

In this post, I’ll share the pros and cons of crowdfunding for business. This will give you an idea about factors to take into account before using this method for funding your business.

Pros of Crowdfunding

Here are some of the major pros of crowdfunding:

1. Simple method

Business owners nowadays like this method for raising funds as it is very simple. In case of funding money through a bank loan or equity share capital, your company has to pass through some complex procedure. However, it doesn’t mean it does not require any work and people will start investing money in your business, without doing anything. Like any other funding method, it also requires putting effort.

2. Can raise a lot of money

Thorugh crowdfunding, your business can raise a lot of money. The main issue for businesses that are getting started is money. And, using crowdfunding, it is possible to raise a lot of money. After raising a sufficient amount, you can use that money for your business growth and expansion.

3. Get feedback

Another advantage of crowdfunding is the business can get feedback about the business idea and know how it can be improved. This allows the business owner to understand the mistakes in his idea and learn how it can be improved.

4. Fast way to raise money

Crowdfunding can be the best and fastest way to raise money for your business. The good thing about this method is you are not being charged any upfront fees. So it helps to raise a huge amount of money, faster and without paying any upfront fees.

5. Test the public’s reaction

The reason why many business owners use crowdfunded is also to test the public’s reaction to their products or services. When you see that the public’s reaction to your product or service is great, it means your business idea is good and it could work nicely.

6. A great alternative to traditional funding methods

Crowdfunding is a great alternative to traditional funding methods. If you are facing difficulty raising funds through the bank loan or any other method, you can consider utilizing crowdfunding.

Cons of Crowdfunding

Here are some disadvantages of crowdfunding:

1. A lot of work is required to build interest

Though crowdfunding is a simple funding method, it’s not easy. To build the interest of the public, you need to keep putting hard work. Many individuals think of crowdfunding as a very easy way of sourcing funds, but it isn’t really true. Even after putting efforts for building interest before the project launch, the success is not guaranteed.

2. The project must reach the target amount

To raise money through crowdfunding, you have to first set the target amount. After putting so much hard work and effort into building the interest of your target audience, if the project fails to reach the target amount, your business goes empty-handed. Not reaching the target amount means the investors who have invested their money will get that money back.

3. May damage reputation

As we have seen, if the business wants to source money using crowdfunding, its project has to reach the target amount, And, when a particular project fails to reach the target amount, it damages the reputation of the business.

 

So here we have seen some pros and cons of crowdfunding. No matter which funding source you choose for your business, every method has its own pros and cons.

Whether or not you should procure funds using crowdfunding is mainly based on your objective and the business type.