If you own a startup or are considering taking the road to owning your own business, you’re likely exploring crowdfunding in Canada or traditional loans.
For most Canadians, the choice between the two comes down to the business’s function, credit history, and need for market validation. Most find that crowdfunding is more accessible. This is especially true for early-stage startups that want to build a customer community.
However, traditional loans from government-backed programs or banks tend to provide more stable financing and larger loan amounts. In today’s blog, our team at Bizfund shares more on the differences between crowdfunding and traditional loans, including the pros and cons of each. Armed with this information, you should have a better understanding of which option best suits your startup.
What Is Crowdfunding?
If you’ve heard of platforms like GoFundMe, Fundly, Crowdcube, Patreon, Kickstarter, GiveSendGo, or FrontFundr, it’s likely that you already have an idea of crowdfunding. This alternative financing option became popular after the 2008 financial crisis.
To put it simply, crowdfunding is a startup funding option that allows your business to collect money or support. With crowdfunding, you raise the money through the platform. Instead of borrowing from a singular lender, you receive monetary contributions from the public after presenting your business idea.
Many Canadians go the crowdfunding route because it helps validate business concepts and creates brand awareness early on. It can also help secure capital without you needing to take on traditional debt.
Today, the Global Equity Crowdfunding Alliance estimates that the global crowdfunding market will expand annually by 15.82 percent from 2024 to 2033.
What Is Crowdfunding In Canada
Crowdfunding in Canada isn’t too different from other parts of the world. However, in Canada, crowdfunding falls under reward-based crowdfunding or equity crowdfunding. With the former, backers will usually contribute funds to your startup in exchange for non-financial rewards. Then, with the latter, startups can offer securities to investors to raise capital.
It’s important to know that, if you want to participate in equity crowdfunding, your startup must meet specific criteria. For example, your startup must comply with financial reporting obligations and operate on a registered crowdfunding platform. So, bear this in mind when deciding between crowdfunding and traditional loans.
Traditional Loans Explained
In Canada, traditional loans are offered through established financial institutions. These institutions follow provincial and federal lending standards.
If you apply for funding with a conventional lender, you’ll need to be prepared to have the lender look at your startup’s structure. They will also check your overall financial health (both yours and your business’s) and your projected revenue model. Often, lenders examine these factors to determine your level of risk. They use this to decide whether to offer or decline variable loan products.
Usually, startups in Canada have access to several traditional financing avenues. For example, you could apply for a government-supported program like the Canada Small Business Financing Program. You could also apply for an operating line of credit or a loan term. In addition, although not a traditional loan, your startup could also explore alternative financing through companies that offer merchant cash advances, such as Bizfund.
With traditional loans, you can use the financing to buy equipment, expand operations, or manage cash flow. However, you’ll need to meet lender criteria, which can differ.
Pros and Cons of Crowdfunding and Traditional Loans
To determine if crowdfunding in Canada or traditional loans is the better option for your startup, you might want to consider a few pros and cons. Below, you’ll learn more about why each option might be the better choice or best left disregarded.
Crowdfunding
Pros
- Fewer barriers to funding: If your startup is too new for bank loans or investment rounds, crowdfunding can offer easier access to capital. This can help your business move forward without strict investor requirements or underwriting.
- Market validation before launch: As mentioned earlier, crowdfunding enables startups to test whether there is real demand for their product or service. Through crowdfunding, your company can use data from supporters to refine prototypes, strengthen future investor pitches, and attract early customers.
- Improved community building: You can build an engaged community that shares your campaigns and provides your startup with feedback. By creating a community, you also increase the likelihood that supporters will become early adopters. In the long term, this support translates into brand advocacy and sales.
- Canadian and worldwide reach: Crowdfunding platforms help your business gain greater national and global visibility. This means you can quickly build a customer base and expand brand awareness in local and international markets.
- Less financial risk: With crowdfunding, you’re far less likely to incur financial risk because you’re not taking on debt or giving up large amounts of equity. This lets your startup preserve its cash flow and ownership from the beginning.
Cons
- Failure rates can be high: Crowdfunding platforms can be crowded, so many startup campaigns fail before they even begin due to poor visibility.
- Time commitment can be excessive: You’ll need to invest significant time in videos, prototypes, updates, and marketing for crowdfunding. This can pull time away from you as you develop your service or product.
- Delays can impact a company’s reputation: If your startup experiences campaign delays or failures, it can severely damage your company’s reputation, not in a good way.
Traditional Loans
Pros
- Repayment structures are predictable: With traditional loans, you’ll have access to fixed repayment amounts, making repayments predictable. This helps you budget monthly expenses and long-term cash flow, promoting stability.
- Capital cost is lower compared to equity: With a traditional loan, you can access capital without giving up too much of your startup. In many instances, when interest rates are competitive, the overall cost of financing is less than selling your company shares to early investors.
- Credit history is built: When you pay your loan back on time regularly, you can build your startup’s credit history, strengthening your credit profile. This can make it significantly easier to qualify for larger loans, equipment financing, and lines of credit in the future.
- Lenders are regulated and reliable: Because Canadian financial institutions must follow strict regulations, your startup benefits from greater stability, consumer protection, and transparency. This means your startup will know exactly what fees, responsibilities, and terms apply to financing secured.
- Access to larger financing amounts: In Canada, most banks and credit unions can offer larger loans than can be raised through crowdfunding campaigns. With more access to funding, you can finance inventory, vehicles, equipment, or even expand operations.
Cons
- Approval requirements are strict: Lenders require strong credit profiles, so many Canadian startups fail to qualify even if they have a financial history and collateral.
- There is limited flexibility: With traditional loans, terms are incredibly rigid. It’s difficult to refinance or adjust payment schedules, especially for early-stage startups.
- The application process can be long: Funding through traditional lenders can take a long time since your startup will have to gather financial statements, prepare documents, and create business plans. In addition, there can be delays.
Tips to Secure Financing Through Crowdfunding or Traditional Loans
If you want to secure financing through crowdfunding or traditional lenders, there are a few tips to keep in mind. With this in mind, below you’ll find a few suggestions that might get your startup the funding it needs:
- Show value: Crowdfunding backers and lenders want to see that there is value in lending or giving you money. This means you need to show a clear business plan with realistic financial projections. You might also need to show a roadmap of how you will use the funds to grow your startup.
- Strengthen your financial profile: If you want to appear more attractive to lenders and crowdfunding platforms, it’s a good idea to keep your business and personal credit profiles in good standing. This will help strengthen your profile, so try not to miss payments and maintain good debt-to-income ratios.
- Build credibility: It’s essential to ensure your startup is known for its credibility with lenders and on crowdfunding platforms. That’s why you need to prove your credibility through consistent communication and strong branding for crowdfunding and through demonstrating viability with traditional lenders, as we said.
The Key Takeaways: Which Option Is Right for You?
Choosing between traditional loans and crowdfunding in Canada can be difficult. The decision depends on your startup’s needs and goals. Most startups find crowdfunding the best option if they want to build an audience, test market demand, or raise smaller amounts of money without worrying about repayments.
In contrast, traditional loans can work for startups that have established good credit. They also work for those with predictable revenue and a need for a larger, more structured financing solution. So, ultimately, our advice is to determine how much capital you need. Then establish how quickly you need it, and whether you prefer bank-backed stability or community-driven support.
However, if you don’t want to go the crowdfunding or traditional loan route, there are alternative financing solutions. Solutions like a merchant cash advance, as we mentioned. With a merchant cash advance, you could secure up to $300,000 for your startup. If you go through us at Bizfund, we don’t rely as heavily on credit profiles as traditional lenders do, and we’re more of a sure thing than crowdfunding.
