post by:
Carmen Marks
Start-ups have a hard time getting started for several reasons. Maybe your credit history isn’t good? Maybe you don’t have the money? Whatever your situation, you can reach out to others and ask for help. Crowdfunding and peer-to-peer funding may be what you need to launch your ecommerce business.
What Is Crowdfunding?
Crowdfunding is a group of people coming together to fund a particular project. There are investors and businesses. Investors will loan their money to the particular business in hopes of making a profit. This is not always the case, and is a risky strategy. Instead of reviewing the person or business credit history, they listen to a pitch. The business has to advertise the product to them. So, it has to be special if you’re going to find investors that will bet on you. On the positive side, businesses don’t have to pay back the money they borrowed if their business fails.
Pros
- There’s less risk for businesses.
- You keep your equity and rights to your company.
- You have access to a large community of like-minded people.
- Your campaign could be successful with all the experienced help.
Cons
- Your investment might fail.
- Unless protected with copyrights, trademarks, and patents, your idea could be stolen.
- There are fees for being successful.
What Is Peer-To-Peer Funding?
Peer-to peer funding is a group of people coming together to fund a particular project. There are lenders and borrowers. The lenders review your credit history and business history. It’s the safest of the two options for lenders and not to be mistaken for crowdfunding. Instead of giving away equity, you pay interest on the money you borrow, much like a traditional loan. There are several online platforms that help match lenders with borrowers, so no need to go searching for help alone. If you’re having a hard time getting funding from a bank, then this route may be the one to take.
Pros
- The returns are higher for the investors and businesses.
- Borrowers have easier access to the source of funding.
- There’s more competition, so the interest rates are usually lower than banks.
- The application and processing is very quick.
Cons
- It’s a high credit risk.
- There is no government/insurance protection.
- It may not be legal in your area.
What Is The Difference?
Crowdfunding and peer-to-peer funding is often lumped into the same category, but they have key differences that every lender and borrower should pay attention to.
For example, crowdfunding is a loan that the business doesn’t have to pay back if they don’t manage a successful start-up. Peer-to-peer is a loan that is paid back with interest, regardless of your success. It’s more difficult to obtain a peer-to-peer loan, as well. There are credit checks involved, which can make those with bad business or personal history a poor candidate. Whereas, crowdfunding is dependent, not on credit history, but on your sales pitch.
Which One Is Right For You?
If you want to sell a unique product. You need prototypes and funding for the campaign, then crowdfunding might be right for you. Especially, if you have poor credit history and can’t get a loan at traditional banks. If you provide a service, this is probably not for you. Crowdfunding is aimed at consumer-facing products like card games, clothes, or accessories. It needs to be flashy and new. Something that will guarantee a good campaign. Investors like to see something with high-chances of success, so put your game face on and sell your idea.
Regardless of the type of business you have, peer-to-peer funding is the safer choice. More people will invest in you because their money is taking a lower risk. They will check your personal and business history, so if you have bad credit, be prepared for rejection. But you never know, someone might be willing to take the risk. This isn’t great for start-ups due to the lack of business history, but it would be good for businesses that need help growing. Great part, if approved? The money is much easier to access than crowdfunding.
Are There Alternatives?
Merchant Cash Advance
A merchant cash advance is a great alternative if you are struggling to be approved. There are several companies willing to lend you a hand with your business. With a merchant cash advance, you pay back the lump sum they loan you with a percentage of every debit and credit card sale. Your business only needs to have existed for three months before they’ll consider you. Credit history will depend on the deal they hand you. Some won’t approve your application at all, but there are certainly those who will, even with a bad credit score. Great part? You control where the money goes. There’s no monthly spending limit either.
Inventory Financing
Inventory Financing is wonderful if you’re looking to boost your inventory or preparing for a product launch. It’s generally a short-term loan that will be paid back once you sell the goods that you restocked. The inventory itself is the collateral, so you don’t have to worry about your other business assets being at risk. Downside? They may have higher interest rates than other types of loans. But with this loan, you can request a credit line, so you can access it when you need to. It’s a simple and safe way to stay ahead of your product spikes. It allows you to plan a launch, so you’re not caught off guard by customer demand or miss out on sale opportunities.