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Should I try crowdfunding or a loan for my startup?

Summary

Crowdfunding and bank loans are both challenging to land for new businesses. A third option may make more sense

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QuestionDear Your Business Credit,
I would like to start a Web design business and need about $2,000 to cover the costs of a new computer, a new phone and some other equipment. I just graduated from college and don’t have much money saved. Do you recommend crowdfunding, or should I try to get a bank loan? — Jim

AnswerDear Jim,
Congratulations on your graduation. Starting a business can be a great way to get work experience that will make you more marketable, whether you stay in business for yourself or eventually decide to take a job somewhere.

I would suggest looking into another route altogether to get yourself set up. If you already have a laptop and phone, see if you can get by with them — as long as they’re functional — during your startup period. Look for work through freelance marketplaces such as Mediabistro, PeoplePerHour, or Elance to raise money to pay for the equipment you need.

As you get feedback from the marketplace, you will have a sense of where you really need to put your money to grow the business.

Of course, if you don’t have basic office equipment, you will need to find a way to buy it. It will be hard to get a bank loan for a startup, so I would suggest asking a family member for a loan or using a credit card if you have good credit and can get a decent interest rate. It can be a good way to build your credit profile.

Pick a card that awards rewards points, and you may be able to cash some of them in to pay for other things you need for the business. One advantage of using a credit card is you don’t have to write a business plan to sell a lender on your idea. It’s your decision alone to borrow within your credit limit. Just make sure you don’t borrow more than you can pay back on time.

Is crowdfunding a good option for you? I’m not so sure. According to Kickstarter, one of the major sites, more than 43 percent of campaigns on its platform reach their funding goals. The entrepreneurs I know who have raised money through crowdfunding have already made a big effort to build a following on social media, so they can solicit support from a wide audience. That takes a lot of time. Since time is your most precious commodity as an entrepreneur, you will need to decide if the investment of those precious hours is worth it.

The successful campaigns I have seen for small businesses have also tended to offer new products that customers want to buy or have been for existing stores that needed help from supporters to meet a specific goal, like moving to a new location.

Take a look at Kickstarter. The most funded campaign was the Pebble Watch, a cool smart watch — similar to a smartphone, but in the form of a customizable watch. It raised almost $10.3 million. That was followed by the OUYA video game console, which raised nearly $8.6 million.

Since you don’t need to raise that kind of money to get started and it will be hard for a fledgling web design business to compete for attention against high-profile projects like this, it’s probably easier to turn to a more direct route: the Bank of Mom and Dad or a credit card. Put the time you save into winning customers, which is likely your most important job right now. Good luck!

See related:Credit and finance options for young entrepreneurs, Entrepreneurial and under 21? You’ll need to build a credit record, Small-business bank loans become a bit easier to get

 

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