If you are looking to raise financing for your small business or startup, there are a lot of routes you can explore. Two of them include crowdfunding and digital financing. Generally, both financing models are well-suited to grow and develop SMEs. Where people make the mistake, however, is in believing that both funding models are one and the same. They are actually quite different. And such misunderstanding affects the funds received because there are some essential differences between crowdfunding for business and SME Digital Financing. So, which one is the best for your business?
Crowdfunding for business and SME Digital Financing share one common principle, which is raising finance from a group of individuals or investors who pool together finances via an online intermediary. Both are non-bank alternative financing models that are suitable for SMEs. In fact, SME digital financing is one of the categories of crowdfunding investment. That’s probably why some people find it difficult to differentiate the two.
The essential difference between crowdfunding for startups and SME digital financing is the way funding is returned to the investors. With crowdfunding, issuers or project initiators will repay investors with rewards (commonly in the form of company product) or equity of the issuer’s company. With SME digital financing, issuers repay their financing to investors in a similar fashion as bank funding. The issuer of SME digital financing will have to repay the investors’ investment plus interest. Typically, the repayment is done monthly.
To understand which model will be suitable for you, you need to learn about the benefits given by both financing models.
Benefits of Crowdfunding for Startups
The issuer (or crowdfunding project initiator) will gain access to a marketplace of supporters and regular backers. But you do need to promote your project or company to attract investors. Typically, an issuer doesn’t need to worry about technical aspects such as payment processing etc. Their chosen crowdfunding platform takes care of that. Usually, crowdfunding platforms have in-depth analytics which will give you an idea of which rewards are the most popular and where people will find your project online.
One key advantage of crowdfunding is that it allows startups to test the market demand for their product or service. By launching a crowdfunding campaign, entrepreneurs can gauge interest and gather feedback from potential customers before fully committing to production. This early validation can save time and resources, ensuring that the business is aligned with market needs. Furthermore, crowdfunding can serve as a powerful marketing tool, increasing brand visibility and attracting a community of engaged supporters who can become loyal customers in the future. Additionally, it provides an opportunity for startups to build a community of advocates and ambassadors for their brand, helping with long-term customer retention and growth
Benefits of SME Digital Financing
This type of financing has a fixed repayment rate, and is very easy to apply online, since all SME digital financing platforms are operated virtually. The issuer doesn’t need to have collateral, which makes SME digital financing an excellent choice for small businesses. The financing can be obtained fast, so you do not need to wait too long to get financial support, and it will be deposited directly into your bank account.
One significant advantage is the streamlined application process, which often requires minimal documentation and paperwork, reducing administrative burdens for small business owners. Moreover, SME digital financing platforms typically offer flexible repayment terms, allowing businesses to tailor their repayment schedule to their cash flow, thus easing financial management.
As is the nature of business, each individual business and startup has its own needs and requirements. Thus, it is hard to say if crowdfunding or digital financing is the best bet to finance your business. It is best to assess your needs and financial status before determining the most suitable financing method for your business.
To learn more about SME digital financing vs crowdfunding for businesses and startups, head over to our blog.
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