Crowdfunding vs small business loans: choosing the right funding for your business

When raising funds for new ventures or expansion, many business owners turn to high-street banks or seek wealthy external investors. However, crowdfunding loans and investments are becoming increasingly popular, with digital lending platforms enabling businesses to gain the interest of hundreds or even thousands of small investors and lenders.

We explore the potential value and impact of crowdfunding, how it differs from peer-to-peer lending and its benefits compared to other growth financing options, including other equity funding solutions, and flexible business loans. 

What are crowdfunding loans?

The term crowdfunding loans can be a little misleading, as crowdfunding primarily involves various individuals pledging money to invest in a pitch, usually in exchange for equity or rewards. While some platforms offer opportunities to lend money to business ventures, rather than invest, or a combination of both, these are usually referred to as peer-to-peer lending (P2P) platforms. 

Most crowdfunding involves raising money by offering a stake in your business to multiple investors, often through online platforms like Crowdcube, Kickstarter and Indiegogo. It can be a powerful way to generate significant investment, especially for start-ups with innovative ideas, strong growth potential or loyal customer bases.

But crowdfunding comes at a cost. While it can provide the capital you need, it typically requires you to give up a degree of equity in your business, meaning you’ll share both control and profits with your investors​.

How do crowdfunding loans work?

Rather than sourcing capital from an external institution, you can raise money from interested parties and prospective customers, building relationships and personal investment. However, crowdfunding can also be a more complex undertaking, especially since you have to offer those investors something in return, unlike a traditional business loan, where no control or equity is offered.

A typical crowdfunding process

1. Create your pitch: Businesses present a detailed pitch on a crowdfunding platform. This includes your business plan, financial forecasts and the percentage of equity you're offering in exchange for investment, plus tiered rewards for different-sized investments.
2. Investors pledge funds: If your pitch resonates, multiple investors will contribute small amounts until your funding target is met.
3. Ongoing relationship with funders: If the crowdfunding campaign is successful, you’ll receive the funds but give up a portion of ownership and possibly decision-making power, while communicating with investors about their rewards, when they’ll receive them and key project milestones/events.

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This funding approach works best for businesses looking to raise large sums without needing to repay funds directly. However, once you give up equity, you’re no longer the sole decision-maker, and your investors will expect some form of stake in the business. This can be shares, with a say in the administrative functions of the business at an annual general meeting (AGM) or something more informal, such as perks or discounts.

Understanding crowdfunding loans and peer-to-peer business lending

Peer-to-peer (P2P) business lending is a form of crowdfunded loan financing that enables businesses to get capital from multiple individual lenders through online platforms. While it can be seen as a type of crowdfunding, P2P lending specifically involves debt finance rather than equity or rewards.

Those providing funds on P2P platforms are sometimes referred to as investors, but technically, they’re lenders who extend credit to businesses for a period, with repayments and interest required. Some P2P platforms, however, may offer hybrid models that combine lending with equity investment options.

How to raise money for a small business through crowdfunding or peer-to-peer lending

When raising funds through crowdfunding, businesses typically create a public campaign or pitch on a crowdfunding platform, outlining their goals, funding needs and value proposition. Meanwhile, peer-to-peer lending platforms connect borrowers with individual lenders. Business owners set their funding target and proposed repayment terms, and lenders contribute towards the loan amount. If the target is met, you’ll receive the sum and start repaying the funds over the agreed period, plus interest payments.

So, if you want to use these funding marketplaces, your financing decision is between business loans vs investors.

Debt finance vs equity finance

Before you decide whether crowdfunding is right for your business, you should consider the key differences between debt finance and equity finance, as they’re two contrasting ways to fund your business needs.

Let’s compare debt finance vs equity finance against key funding factors:

• Speed of funding: Debt finance is usually faster to secure than equity finance, which involves a lot of planning, negotiations and due diligence.
• Borrowing costs: Equity finance doesn’t require capital repayments (unlike debt finance), but it will dilute your ownership and future profits.
• Funding models: There are various forms of debt finance with different lending models, but they generally involve borrowing and repaying capital plus interest, while equity finance is funding in exchange for shares, control and future rewards.
• Business control: Equity finance requires businesses to share a degree of ownership and control with investors, whereas using debt finance allows you to retain full control.
• Applications: You usually need a decent credit history and proven track record for traditional loan applications, while securing equity finance relies on a good business plan and compelling story and convincing investors about your growth potential.
• Suitability considerations: Debt finance generally suits SMEs with consistent revenue looking to move to the next growth stage, while equity finance can be one of the best ways to finance a start-up with high-growth potential or a fast-growing company seeking long-term investment.

Key benefits of crowdfunding for small businesses in the UK

• One of the best ways to finance a start-up, getting access to significant funding without needing to take on debt, incur interest and repay capital 
• Gauging demand, generating buzz and building brand awareness
• Engaging prospective customers and creating a community
• Setting your own rewards and incentives for investment

What are the disadvantages of crowdfunding for businesses to consider?

The main reason crowdfunding may put off certain people is the requirement to give up a portion of business equity and control. If this is not a stumbling block for your businesses, other potential drawbacks to consider include:

• Time-consuming planning and promotional activities 
• Crowdfunding platform fees
• Having to reveal details about your business ideas and finances
• The competition for investment and the risk of campaigns failing to spark the required interest
• Investor expectations and communication obligations

What is the difference between crowdfunding and small business loans?

As mentioned, crowdfunding loans is a bit of a misnomer. Crowdfunding is really one of several alternatives to business loans. This crowdfunding method allows multiple individuals to invest in a project, business idea or pitch for investment to support business expansion plans, whereas small business loans are a form of short-term debt finance, providing a lump sum to be repaid in regular instalments.  

A small business loan allows you to borrow funds without giving up any ownership in your company. They can be secured or unsecured loans and typically have a fixed repayment schedule. They can help you grow your business, acquire key assets, improve cash flow or invest in new opportunities without sacrificing equity​​.

Digital lenders like iwoca can offer fast access to funds and more flexible terms, tailored to your needs, while letting you keep full control over your operations.

Is crowdfunding better than a business loan?

Crowdfunding is great for new ventures looking to gain interest from potential investors and gauge consumer demand, while accessing capital without repayment being required. Business loans allow you to retain full ownership control and equity, as you repay capital borrowed over a matter of weeks, months or years. The option that’s better for your business depends on your funding needs, urgency, risk appetite and various other factors.

Crowdfunding tends to suit innovative tech products, on-trend business areas and sustainable ideas and solutions that solve a key problem or fill a gap in the market. 

Why opt for a small business loan over crowdfunding loans and investments?

Crowdfunding has obvious appeal for start-ups or growth-driven businesses, with the exciting prospect of pitching your plans to a large number of people and accessing capital to make them a reality, without taking on debt. However, the model does mean giving up control, shares and other rewards in return. Small business loans enable you to finance operational needs, spread the cost of key assets and increase promotional activities, without giving up any of your company.

Key reasons why you might choose a small business loan over crowdfunding:

• Retain full control: With a small business loan, you keep 100% of your business. Equity crowdfunding requires you to share ownership and often, decision-making power with investors.
• Fast access to capital: Crowdfunding is typically used for large-scale projects or long-term growth. If you need a quick injection of cash to seize an opportunity, or manage a temporary shortfall, short-term business loans offer fast access to working capital for small businesses. For example, with iwoca loans, you can be approved and access funds in as little as 24 hours​. With crowdfunding, it can take months, preparing your campaign, pitching and waiting for funds. Even if you hit your funding target, there’s still a delay before the money is in your account. 
• Flexibility: Whether you need to purchase stock, hire staff or boost marketing efforts, small business loans let you apply funds where they’re needed, with potential options to overpay, repay loans early and, in some cases, ​​top up. Yes, crowdfunding lets you set your proposed terms and funding target, but you’re giving up equity and control in return.
• No strings attached: While crowdfunding can be an exciting way to attract investors, it comes with strings attached. Investors expect updates, reports and, ultimately, a return on their investment. This ongoing relationship can add complexity to your business management. There are no such strings with loans, but you still need to be responsible with debt management. 
• Build credit history: A bonus of getting a small business loan is that you can build your business credit history. As long as you don’t default on repayments, you’ll be in a better position when seeking future funding.

Summary: Crowdfunding vs small business loans

As you can see, crowdfunding and small business loans both provide vital capital to help companies fund their growth ambitions, but the contrasting trade-off for funding presents various pros, cons and suitability considerations to ponder.

Below we’ve summarised the key differences between equity crowdfunding and small business loans in this quick-glance comparison table:

Alternative small business funding options to crowdfunding loans

Not sure if crowdfunding is right for you? No problem. There are various alternative small business funding options you could consider, offering varying benefits and funding models to suit different needs and preferences.

Here are some top equity and loan finance alternatives to crowdfunding:

• Flexible business loans: Short-term business finance, usually unsecured loans from digital lenders, often quick and easy to apply for online. With iwoca, you can apply for our Flexi-Loans in minutes, without needing collateral, and get tailored terms with fee-free early repayments.
• Merchant cash advances (MCAs): A form of revenue-based finance with a fixed rate of borrowing that’s repaid as a percentage of future card sales. MCAs are ideal for retailers, online businesses and other companies affected by seasonal cash flow fluctuation.
• Asset finance: A range of finance agreements, with varying levels of flexibility, for hiring and acquiring key business assets, such as machinery and vehicles, for projects, premises refurbishments and expansion plans.
• Property finance: Funding solutions dedicated to business property needs, including commercial mortgages, development finance and bridging loans.
• Venture capital: Firms that gather funds from various sources to invest in commercial growth opportunities, offering significant capital in exchange for a proportion of control in the business and a share of future profits.
• Angel investors: High-net-worth individuals willing to invest their own money in a business they believe has good growth potential or that aligns with their vision. Like with VC investment, you’ll share ongoing profits and control, and the risks, with business angels.
• P2P lending platforms: Online marketplaces for businesses and entrepreneurs to match with investors that facilitate agreements. Like with crowdfunding, you pitch your funding requirements and multiple lenders (or so-called ‘investors’) can offer capital to meet your target, with you agreeing on terms for repayment. 

As you can see, there are lots of ways to fund your business needs, from crowdfunding, loans and cash advances to private investments from firms and wealthy individuals.

Growing your business with iwoca’s flexible financing

Big ambitions require the right support. You might have amazing plans for growth, but lack the cash flow to make them happen. Or maybe you just need breathing room to handle day-to-day expenses. Whatever the case, you need financing that works with your business, not against it.

Iwoca’s business loans are designed for fast, flexible and stress-free access to capital, so you can focus on what you do best: growing your business. We aim to make it as easy as possible to get the funds you need, when you need them​.

Key benefits of iwoca Flexi-Loans:

• Fast applications, approvals and access to finance: Apply in minutes and get approved within 24 hours, with successful applicants often accessing funds on the same day.
• Flexible loan terms and borrowing amounts: Borrow from £1,000 to £1 million, for a few days or weeks up to 60 months, with repayments tailored to your needs and cash flow, with options to repay early free of charge.
• No hidden fees: We provide transparent pricing, so you know exactly what you’re paying upfront. Plus, you only pay interest on funds you draw down.
• Support when you need it: Get a dedicated account manager to guide you through the process and answer any questions​.

Find out how to apply for a business loan from iwoca and check out our loan calculator to get an idea of your likely repayments.