Is crowdfunding replacing traditional bank loans?

What is crowdfunding?

While loans from banks have traditionally funded business activities in the past, companies are increasingly looking to crowdsourcing sites such as Kickstarter and Indiegogo for business financing. That said, what exactly is “crowdfunding”? With the crowdfunding concept, a website’s audience or the “crowd” essentially become loan officers for businesses. According to a study from Massolution, crowdfunding helped businesses and individuals raise approximately $2.7 billion dollars in 2012. Additionally, this number is expected to double in value by the end of 2013.

Why is Crowdfunding Becoming so Popular Today?

While small business lending from banks totaled about $700 billion in 2008, the number is now substantially less according to the Federal Deposit Insurance Corp. Moreover, in order for a company to obtain a more traditional bank loan today, a formal business plan with financial forecasts, a substantial amount of collateral, and a good working relationship with the bank is required . Additionally, for companies that do qualify for a business loan, banks currently charge a relatively high rate of interest. In essence, then crowdfunding is a more affordable way to finance companies when compared to more traditional business bank loans.

Will Traditional Bank Loans Still be Relevant in the Coming Years?

While crowdfunding is a great way for entrepreneurs to raise money for their business endeavors without having to meet strict financial requirements, there will still be a need for banks in the future. For example, if a company initially raises money through a successful crowdfunding campaign, banks will be likely to offer them a loan when the need for a second round of funding arises. Further, as crowdfunding often takes time,home equity loans and even credit cards will remain attractive options in cases where money is needed quickly.

Overall, while crowdfunding is an excellent long term alternative to traditional bank loans for companies, there are still occasions where bank loans may make more business sense.