Crowdfunding vs. traditional financing

Raising capital is a critical step in the success of a startup and the growth of any business. Financial support is the fuel for ideas and must be constant, through strategic planning of the supply of economic resources. Today, funding sources can be many and diverse, with an initial major division between alternative and traditional finance. We want to focus specifically on a comparison of crowdfunding vs. traditional finance to understand the profound differences between the two modes of financing and the opportunities each can offer.

Crowdfunding has emerged as a powerful alternative for businesses, allowing them to raise capital directly from a broad online audience. This mode not only facilitates access to funding, but also creates marketing and networking opportunities. On the other hand, traditional financing, such as that provided by banks and venture capital funds, offers stability and a guaranteed amount of capital, but can come with stringent requirements and bureaucratic complexities.

We will find out how and when to make the most of these two types of funding sources and also how integration between them is possible.

Crowdfunding and traditional financing compared

Crowdfunding and traditional financing represent two distinct approaches to raising capital, both with unique mechanisms and dynamics.

The key difference is that equity, lending, and reward crowdfunding draw on capital from a multitude of investors, who are mostly ordinary people, although they can also be institutional investors or company stakeholders; traditional funding sources, on the other hand, are banks, private equity or venture capital funds, business angels, and other lending institutions.

	Crowdfunding	Traditional finance
Definition	Raising capital from a multitude of online investors.	Applying for capital from individual institutional players: banks, venture capital, private equity, business angels.
Types of financing.	Equity, debt, pre-purchase (depending on the type of crowdfunding).	Equity or debt.
Accessibility	Online platforms with selection, entry requirements also accessible to startups and small businesses.	Strict economic and financial requirements.
Collection process	Publication of the project on the platform, marketing activities and communication with the public.	Formal request, detailed analysis by the financial institution, negotiation of terms.
Return for investors	Immediate rewards, corporate equity or interest on the loan or a product depending on the type of campaign (equity, lending, reward).	Interest on loan or equity shares, any fees.
Control and autonomy	The company sets the terms of the operation and maintains governance.	The bank, fund, or institutional investor sets conditions for the business and may require a monitoring and management role.
Rischo	High: there is no guarantee of success.	Low: If funding is approved, capital disbursement tends to be secure.
Costs and fees	Crowdfunding platform fees Marketing costs for campaign promotion Interest (for lending crowdfunding)	Legal fees Commissions  Administration and management costs Interest (for loans)

In general, we can infer from this table that crowdfunding is a more accessible and flexible mode of capital raising for companies, involving greater autonomy but also greater risk and less capital, and offering the opportunity to do marketing exclusively and increase brand awareness, acquire customers and other stakeholders.

Traditional funding sources, on the other hand, are often difficult for startups and small companies to access, are more selective, impose conditions unilaterally, and grant less flexibility, but provide certain and potentially more substantial capital. In return, however, banks, funds, and business angels gain some influence in the company's decision-making processes.

As always, there are nuances: learning about the tools also serves to gain awareness for analyzing the significant variables in each specific situation.

Crowdfunding: pros and cons

We summarize in this paragraph the main advantages and disadvantages of raising capital online, which we discussed more extensively in the article on the pros and cons of crowdfunding.

Advantages of crowdfunding

Wide audience: possibility of reaching a large audience of potential investors. It becomes easier to raise a certain amount of capital if you can divide it among many people, so that each person has to put in even a small portion.

Accessibility: crowdfunding has democratized access to capital, enabling even startups or small businesses to obtain financial support while being unable to offer a high level of collateral and creditworthiness.

Flexibility: There are different types of crowdfunding that allow companies to configure capital raising according to their business model and time horizon, liquidity needs, and availability of resources. In addition, the conditions of participation in the crowdfunding campaign are set by the company itself, within regulatory limits.

Marketing opportunity: crowdfunding is not only a fundraising mode, but also a powerful marketing tool. Entrepreneurs can test their ideas in the marketplace and get feedback from potential customers before launching a product, validate a business model or do a rebranding or increase their visibility and gain new customers and other useful contacts.

Community building: crowdfunding campaigns allow entrepreneurs to create a community around their project. Investors become supporters and brand ambassadors, fostering word of mouth and increasing brand awareness. The community becomes a permanent asset for all company activities.

Disadvantages of crowdfunding

Uncertainty and risk of campaign failure: until the campaign closes, there is no certainty about the amount of capital that will be able to be raised, although expressions of interest may define a boundary. A campaign that does not reach its funding goal, moreover, can result in a waste of time and resources, as well as reputational damage. According to the latest Politecnico reports on crowdfunding in Italy, however, campaign success rates are around 90 percent for equity and 99 percent for lending crowdfunding.

Cost: although crowdfunding may seem like a cheap option, and it often is cheaper than traditional financing, promoting the campaign and putting in place an effective marketing and sales strategy has a significant cost that must be factored in. Add to that the fees for the platform hosting the campaign, which are quite low but always present, and any interest to be paid in the case of lending crowdfunding. One must have a minimum amount of resources to invest and consider that these expenses will erode the capital raised.

Exposure: a crowdfunding campaign requires a well-planned marketing strategy, involving high exposure on social media and all communication channels that the company can use. When there is such a high level of exposure is widespread, the reputational risk is always high.

Complexity: raising capital online implies knowledge of the specific regulations for this type of activity, compliance with the bureaucratic process and sponsorship limits, but also skills in the use of software essential for effective marketing activities and the use of significant human resources and time that vary greatly depending on the individual situation.

Traditional financing: pros and cons

Traditional financing is a classic option for raising capital, which includes various sources such as banks, venture capital funds, private investment funds, business angels, and subsidized government funding. 

Advantages of traditional financing

Greater stability and substantial capital: traditional financing often offers access to larger sums of capital than crowdfunding. Once a loan is contracted, moreover, you are assured of receiving the requested amount if the agreed terms do not change.

Professional support and network: when traditional lenders are investment funds or business angels, they provide not only capital but also expertise, experience and connections useful to the business and can become strategic partners, supporting long-term growth.

Opportunities for follow-up funding: companies that receive funding from venture capital or other traditional investors may find it easier to obtain additional investment for later stages of development. This is because first-time investors may be more ready to invest again in a company they have already believed in and met expectations, and because they can attract other investors.

Simplicity of procedures: although it is not easy to obtain traditional financing, the procedures for applying are known and standard and require fairly predictable time and documentation preparation activities that can be framed in normal business life.

Disadvantages of traditional financing

Strict requirements: To access traditional financing, businesses must demonstrate their soundness through detailed business plans, financial projections and possible collateral, as well as meeting precise conditions in the present and future.

Cost: legal fees for preparing documents and contracts, fees for lenders, interest on loans, and shares to be given to funds or business angels reduce the amount of capital received and may impact financial sustainability in the long term.

Influence of investors: especially venture capital funds and business angels impose some influence in the management of the company and acquire a share of the capital. This can lead to business decisions dictated more by the needs of investors than by the original visions of entrepreneurs.

Crowdfunding vs Traditional financing: which one to choose?

The choice between crowdfunding and traditional financing depends on the specific situation of the company, the stage of life it is in, its goals, the resources at its disposal, and the medium- and long-term strategy from the economic-financial point of view, but also from the positioning point of view.

Crowdfunding for startups often turns out to be the best choice because it better meets their needs for accessibility and fits well with their innovative character. On the other hand, a startup that has high proven potential and needs large amounts of capital and professional support can also benefit greatly from seeking funding from business angels or venture capital funds that specialize in startups.

Similarly, an established, medium- or large-sized company that has a robust business plan to implement and a long set of metrics to offer can easily access traditional financing, for example with a bank, and obtain a very substantial capital injection. Yet, even these types of companies could benefit greatly from crowdfunding as a marketing tool to do rebranding, to expand into a new market, to launch a specific promotional operation, to take root in a limited territory, and other targeted purposes.

To these considerations we must add another, perhaps the most important one: it is not mandatory to choose between crowdfunding and traditional financing! The two ways of raising capital can complement each other.

Integration between funding sources

Diversifying sources of capital is very useful for a company because it reduces risk and dependence on a single source, increases flexibility, and allows a company to plan a long-term financing strategy that ensures ongoing financial support for business growth plans. 

Here are some examples of integration between crowdfunding and traditional financing:

• Crowdfunding campaign as a springboard to improve one's credit reputation, validate business, and then access traditional financing
• Crowdfunding campaign as a visibility tool to attract the attention of business angels and investment funds
• Lending crowdfunding as a source of short-term liquidity while waiting to unlock the lengthy process of traditional financing ("bridge financing")
• Traditional funding as an economic basis for a marketing operation through crowdfunding.

Such a hybrid approach not only optimizes fundraising opportunities, but also creates a solid foundation for sustainable, long-term growth. That is why capital raising should be a real business asset.