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Is Crowdfunding the Next Big Thing in the Lending Sector?

7 Nov 2018

Raising funds for small businesses can be a lengthy and taxing process. There are very limited options for a first-time entrepreneur who does not have any credit history. Struggling entrepreneurs whose first few ideas did not click well have it hard, too. They are not welcomed by angel investors, venture capitalists, banks and certainly not by friends and family. So, should they simply give up on their dreams and aspirations? Certainly not. Crowdfunding is the mighty saviour of some of the most brilliant innovations, ideas and charitable causes…

What Is Crowdfunding?

Crowdfunding is the method of raising capital for a business from a large number of people, typically using the Internet. Crowdfunding combines the power of social media and specialized crowdfunding platforms to provide fund-seekers with the money they need to build their ideas or innovations. Examples of these specialized online platforms, including Facebook, Catapoolt, Faircent, FuelADream, Rang De, Ketto, Wishberry and so on. These online platforms allow business owners to project their ideas into the world and connect potential investors apart from the traditional venture capitalists and close friends and family with entrepreneurs.

Crowdfunding has been a huge success for several organizations and individuals worldwide. 738.9 million US dollars’ worth of funds were raised worldwide in 2016 because of crowdfunding alone:

What differentiates Crowdfunding from Business Loans?

For one, the money is not from one single source; it comes from multiple investors across the world who are interested in that exact innovation or idea. Moreover, there is no fixed interest rate that the fund-seeker has to pay to the investors. The returns given to the investors can be monetary or non-monetary. However, business loans can specifically fit the exact requirements of a business whereas it may be difficult for fund-seekers to get the exact sum of money they need from crowdfunding platforms.

Who is Crowdfunding for?

Crowdfunding is ideal for any individual or organization that aims to raise money for an idea (ranging from a simple business idea to a creative innovation) or a cause (like charities). Businesses who aim to inject capital into their business or raise funds for expansion can use an online platform to acquire the money they need, from people across the world who believe in the feasibility of their ideas. Crowdfunding is also used by filmmakers, artists, musicians to fund their projects.

Process of Crowdfunding

The process of crowdfunding depends on the platform used to raise the funds. Some crowdfunding platforms allow investors to invest for monetary returns, whereas others provide investors with a variety of non-monetary returns like free products, involvement in designing and prototyping the products or services. A few platforms also specialize in eliminating banks and allowing people to lend money to businesses directly for guaranteed returns.

The process is like an episode of Shark Tank, just virtual. And the Sharks are from a variety of different backgrounds, interested specifically in the exact area of the idea. One has to pitch their idea to the Sharks in exchange for something decided by the platform and neither party can negotiate the returns. So, the process starts with making the idea realistic, polishing it to make it more feasible, and sharing the story out loud. Finding a good way to present everything in a moving video clip is important, too. One must then set a target for the amount of money that is required to be raised. This helps in visualizing better. Next, one must come up with a good way to incentivize the potential investors to actually invest. The returns must be competitive and compelling. Marketing your campaign is equally essential – reaching out to and targeting the correct investors along with effective use of social media to advertise. One must make sure that the true value and importance of the product or service offered is understood.

Benefits of Crowdfunding

Crowdfunding is ideal for a variety of different projects within the business category – a new innovation within the same product or service, a company trying to launch a new product or service, a new business being built entirely from scratch, etc.

Entrepreneurs who have no previous experience with funding would find it very overwhelming to approach venture capitalists or bring in angel investors who tend to interfere and play around with the idea itself. Therefore, crowdfunding is ideal for first-timers who do not want any changes to their hard-worked upon, precious innovations or business ideas.

The process of borrowing money from a bank is very lengthy, requiring a lot of paperwork. Crowdfunding is a much faster process, examining the actual product/service and skill of the entrepreneur rather than the ability of a person to be convincing enough to ensure that they would be able to pay back the money. Also, more often than not, banks or other money-lending institutions are not interested or excited by the idea itself and are more concerned with whether the borrower will be able to pay back the sum and the interest. On the other hand, a community of investors that is intellectually excited by the idea of the innovation/business idea is much more encouraging and interesting to work with.

What is fuelling the growth of Crowdfunding?

The increasing usage of smartphones, social media and digital payments has had a combined effect of fuelling the growth of crowdfunding. The use of smartphones has allowed a large pool of unprofessional investors to invest small amounts of money in business ideas and/or innovations that they find interesting. Small transactions in large numbers are being processed with ease on a daily basis, providing an impetus for the growth of big groups of investors each investing small amounts of money in a business or an artist. The growing addiction to social media has led to businesses advertising for raising money as well.

Crowdfunding has helped and will continue helping many entrepreneurs, artists, filmmakers, amongst others who have a lot of raw, unchanneled potential but lack adequate funds or capital. However, it needs to be harnessed by those individuals that are ready to face the risks and challenges of pitching their business or project to a large group of people from across nations. If a business does not require a large pool of money and is rather looking for something that specifically fits their capital requirements, a collateral-free business loan would be better recommended.

That being said, the future of capital-sourcing lies in the hands of progressing financial technology (fintech). At KNAB Finance, we provide businesses with customized, hassle-free loans that do not require them to pledge any collaterals. By effectively harnessing technology, we streamline and simplify the process of obtaining loans for all kinds of businesses so that your aspirations come true exactly the way you imagined.

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