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Crowdfund Loans for Small Businesses

Crowdfund Loans for Small Businesses
Susan Guillory
Susan GuilloryUpdated May 4, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you’re thinking about applying for a small business loan but haven’t found one that fits your specific needs, you might consider a crowdfunding loan. With a crowdfund loan, you don’t go through a traditional bank to borrow capital. Instead, you invite a large number of people to invest in your business in exchange for repayment plus interest over time. In some cases, debt crowdfunding offers lower interest rates, quicker approval times, and a simpler application process than other types of debt financing. However, this method of financing isn’t for everyone. Here’s what you need to know about crowdfunding a small business loan, including the pros and cons and how the process works.

What Is Crowdfunding?

Crowdfunding is a method of financing a business venture or project by collecting small amounts of capital from a large number of people (a.k.a, the “crowd”) through an online platform.There are several types of crowdfunding, including:
  • Reward-based With reward-based crowdfunding, individuals contribute to a brand’s crowdfunding campaign in exchange for a token of appreciation, such as a t-shirt with the company’s logo on it or a sample product. 
  • Donation-based With this kind of crowdfunding, people donate to your campaign without expecting anything in return. Donation crowdfunding is often used for personal campaigns, such as to pay for a person’s medical bills, though businesses sometimes use this option as well.
  • Equity-based This type of crowdfunding is a bit like getting money from a venture capitalist or angel investor, except that, in this case, you're getting small investments from a large number of people. In return for cash, investors receive equity ownership in business.You don’t have to pay back the funds you get, but each investor gets a piece of equity ownership in your business.
  • Debt-based Loan crowdfunding, also known as peer-to-peer lending or marketplace lending, is when a person or company borrows money from a group of people as opposed to a bank or credit union. The money needs to be paid back by agreed upon dates and interest levels.

Is Crowdfunding Right for Your Business?

If you’ve tried getting a loan with bad credit and haven’t been successful, or don’t want to pay the high interest rates that you’re offered, you might want to consider crowdsourcing loan funds. Your business could grow thanks to the contributions of individuals who want to see your brand thrive.A crowdfund loan could help you:
  • Take a new product concept from idea to creation
  • Expand into a new market
  • Buy materials to create products
  • Serve more customers
  • Hire staff
  • Invest in marketing

How Can You Crowdfund Business Loans?

Exactly how you crowdfund a small business loan will depend on the platform, but here’s a look at the steps that are generally involved.

Determine Your Needs 

A good place to start is to consider exactly how much money you need to grow your business, what you will use the money for, and how quickly you will be able to repay the funds. You can then draft a well-thought-out fundraising proposal that offers financial information about your business and a plan for how you will use and benefit from a crowdfunded loan.

Pick a Platform

As you research the various debt crowdfunding platforms, you’ll want to consider the experience and track record of the platform’s founders, and also make sure the company is transparent about their business model and how they make money. Also consider how much you can raise through the crowdfunding site and how long you can run your campaign.

Submit Your proposal

Once you have chosen the right debt-crowding platform for your business, you’ll need to follow the site’s proposal instructions and requirements. Once you submit your proposal, the platform will evaluate it, and possibly check your credit, to determine if you’re a good fit for the platform.

Consider Rates and Fees

If your proposal is accepted, the platform will give you rates and fees for your loan. These are generally based on your proposal and how much risk you represent as a borrower.

Launch Your Crowdfunding Campaign

If you accept the terms, you can then launch your campaign. To do this, you generally need to have a stated goal amount and time frame. Once you launch, participants can determine how much money they would like to lend (in some cases, there may be minimums). When the campaign time frame is over, you’ll get your funding and the repayment schedule will begin.Recommended: 9 Crowdfunding Ideas for Businesses and Startups

Pros and Cons of Small Business Loan Crowdsourcing

Before you decide to crowdfund a small business loan, you’ll want to consider the potential benefits and drawbacks.
Can be easier to qualify for than other loan optionsYou’ll need to repay all the money your raise, plus interest
The decision process is typically faster than traditional funding optionsCan take time and work (and possibly money) to run a successful campaign
Can spread the word about your business and create positive buzzRates can sometimes be high, and there may also be fees

Pros of Crowdfund Loans

If you’ve had difficulty qualifying for other types of financing, you may find it easier to get a crowdfunded loan. The process of getting approved for a crowdfunding campaign is also generally faster than the approval process with a bank.Another benefit of crowdfunding a business loan is that running a campaign on a popular crowdfunding site can give your company more exposure and could result in new customers.

Cons of Crowdfund Loans

Unlike other types of crowdfunding, such as reward-based crowdfunding, you’ll need to repay all the money you raise, plus interest. Failure to repay your loan could affect your personal and business credit.While the decision-making process is generally faster than a traditional loan, it can take time and effort to ensure the maximum number of people see and contribute to your campaign. You may need to hire a marketing consultant who’s an expert in crowdfunding to see success.In addition, not all crowdfunding platforms offer low-interest loans, so it’s a good idea to read the fine print before proceeding. There can also be fees associated with crowdfunding campaigns, so you’ll want to know what those are before you sign up with a site.

Learn More About Lantern's Small Business Funding Options

Crowdfund loans are one option for small business financing, but you may have access to many others, no matter what your credit situation or specific financing needs.If you're interested in exploring your financing options, Lantern by SoFi can help. You can use our fast online search tool to get a personalized small business loan option in minutes.Let Lantern help you find the right financing solution for your small business.
Photo credit: iStock/Andrii Yalanskyi

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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