It seems like every year, new funding trends enter the market. Making it very difficult for small business owners to identify which one is right for them. Two big ones to consider: A Merchant Cash Advance and crowdfunding. Crowdfunding is when you ‘pitch’ your idea to an online community. They then ‘opt-in’ with small incremental funds in support of the idea. This continues until you have enough ‘collective capital’ to launch your concept. A Merchant Cash Advance, however, is one lump sum that is guaranteed from a sole lender. Both options are appealing. So why do we believe that Merchant Financing is better than crowdfunding in the long run?
A wide range of factors influences funding direction: It can be anything from logistics to an opportunity to emotion. The latter (emotion) is an interesting dimension and is not something that us entrepreneurs talk about a lot. It is the idea that having someone buy-in and support your business feels validating. This is part of the reason why crowdfunding is such a big trend in the funding world. Here you have a bunch of people, who all invest in your idea. Each of these investors is rallying in your corner. And for the entrepreneur who travels a mostly lonely path, this kind of crowd support makes all the difference. But beyond the ego boost and the thrill of the chase, is crowdfunding really the best way for your business to take shape? Well, there are a number of factors to consider:
Qualification and legislation
Earlier legislation in Australia meant that only public unlisted companies qualified for crowdfunding, making it quite niche. The good news is that after almost 2 years of debate, as of 7 October, equity crowdfunding has finally been extended to include proprietary companies. That is providing they do not exceed a turnover / gross assets of $25 million. Also they may not raise more than $5 million from this channel per year. Despite the restrictions, this new legislation has opened up the crowdfunding method to a wide pool of eligible companies. Particularly Australian start-ups who wouldn’t qualify for a Merchant Cash Advance as they need to have been in business for at least 6 months to apply. That said, if there is an existing operation in place, a new ‘leg’ of the business in the form of a ‘product line’ or ‘service’ may ‘startup’ with a Merchant Cash Advance.
Crowdfunding takes time
There is nothing more frustrating than having a brilliant idea and then having to wait. With crowdfunding, you are entering into a very long-winded process with an arduous gap between ‘pitch’ and ‘launch’. The model is designed in this way as this necessitates crowd interest and investment. As a result of this timelines can be anywhere from weeks to months or longer! With a Merchant Cash Advance, however, funding approval can happen within 48 hours from application.
Crowdfunding is not for free
In order to entice investors, you need to offer them something in return. This can be anything from a stake in your business to a percentage of future earnings. This opens you up to a wide range of opinions -hundred (if not thousands) of them, in fact. As an entrepreneur who currently runs your own universe, why would you suddenly want a boss?
Further to this, the platform itself comes at a cost. Running your crowdfunding campaign will have a fee and commission attached. On the contrary, while a Merchant Cash Advance is certainly not the cheapest loan on the market, you are paying this premium for speed, efficiency, transparency and sole agency of fund usage.
Crowdfunding requires a huge effort
Generating interest in your product will take an enormous amount of activity. It demands marketing, promotion and paid advertising campaigns to carry your endeavour high above all the crowdfunding clutter. This activity will need to continue ongoing until full funds are raised. If you are a business that has yet to launch, with no track record to speak of, then crowdfunding makes sense. However, if you have a business that is more than 6 months old, and have credit/ debit card facilities, then a Merchant Cash Advance is a more viable solution to solve your cash flow requirements.
You risk divulging your unique idea
Chances are, you are raising funds for something really fresh and innovative. The problem is that crowdfunding requires transparency to draw interest. This exposes you to the high risk of someone taking your idea to market before you achieve your funding goals. A Merchant Cash Advance, however, allows you to act fast and finance your idea before competitors have even blinked.
Success is rare
At the end of the day, while crowdfunding is a shiny new toy in its own right, it may not be the best solution for your small business cash flow requirements. Perhaps a more predictable option like a Beyond Merchant Capital’s Merchant Financing is the better way to go. For more information on how to fund new projects in your existing retail business, call us today on 1300 945 438 and make things happen tomorrow.
Speak with a lending specialist today about funding the growth of your business.