Small business funding options: loans, grants and crowdfunding compared

Five ways to fund a project

• Bank or SBA loan — the largest amounts and the lowest cost of capital, but you need credit history, paperwork and usually a personal guarantee.
• Grants — free money, extremely competitive, slow, and almost always restricted to a narrow purpose or group.
• Investors — real capital for businesses built to scale, in exchange for ownership and a say in decisions. Rarely a fit for one location.
• Credit cards and merchant advances — fast and easy to get, and the most expensive money on this list.
• Community crowdfunding — money from the people who already buy from you, in exchange for rewards. No debt, no ownership given up.

What each option really costs

A loan costs interest and time — months of repayment and an approval process that can take weeks. A grant costs the hours spent applying, most of which produce nothing. Investment costs a permanent share of your business.

Crowdfunding costs a platform fee and card processing, and the work of running the campaign. On Pledzy that fee is 5% of each pledge — 3% for verified nonprofits — plus the card processor's 2.9% + 30¢.

When crowdfunding is the right choice

• The project is specific and visible: equipment, a build-out, a product run, a hard season.
• You have customers who would notice if you closed.
• You need the money in weeks, not quarters.
• You do not want debt on the books or a partner in the business.
• The campaign itself is worth something — it is marketing, a pre-order list and a customer list at the same time.

When it is not

• You need six figures for real estate or payroll runway.
• You are pre-customer, with no one to ask.
• The use of funds is hard to explain in a sentence.
• You cannot commit a few hours a week to running it.

You can combine them

The most common pattern we see is a crowdfunding campaign covering the visible part of a project — the equipment, the room, the launch — while a loan covers the rest. A funded campaign also demonstrates demand, which is a useful thing to show a lender.