Lots of people are talking about crowdfunding these days. Especially new startups as well as small business owners. There has been lots of media publicity about it as well.
But my question is this “Is crowdfunding a friend or a foe to your business?”
Recently I posed this question to my inner group of business owners over coffee and their answers to the same questions were varied. They are not users of any crowdfunding services and have never been. However, their answers can be of help to you as our readers should you decide to use crowdfunding as a way to tide you over financially.
We believe there are always 2 sides to the same coin in any situation and crowdfunding is no different.
Some agreed that crowdfunding is a good idea but must be prudent in using such services while others are more concern about the risks involved in such services.
We shared our experiences as much as crowdfunding is concerned. However, after much sharing we came to the same conclusion that crowdfunding may NOT be a good deal at all for the business.
Let me try to explain here.
- When a business owner approaches a crowdfunding platform, chances are the same business owner has maxed out ALL of his/her credit facilities with banks and other finance houses. To them, crowdfunding is the ONLY way to save them from whatever financial situation they are in.
- Most business owners use the funds obtained to pay off outstanding loans repayments, normal monthly operating expenses, to stock up inventories, to fund their Account Receivables, and to pay suppliers etc. They are just borrowing from Peter to pay Paul. It is what I called “a Debt-Spiral.” A sure way to die in any business.
- However, there are minority of business owners who turned to crowdfunding to expand their business operations locally or overseas, to capture a business opportunity, or to automate current business operations. While these are good and valid reasons to take a loan but is there any guarantees that your business plans for such expansion will pan out? And can the ROI of your business plans be able to fulfil the exorbitant interest rates averaging 20% per annum charged by the crowdfunders?
- Frankly, crowdfunding platforms are just like a middle-man between business owners who are in need of money and individual investors who are willing to loan out their monies. As a middle-man, they just take a percentage cut calculated from the amount secured for and from the business owner. This is where their responsibilities end.
- While most crowdfunders claimed to have come from the banking and finance backgrounds, they have all failed to do in-depth due diligence on those businesses they are trying to help fund. On the other side, investors see every business as an “investment opportunity” because of the high interest rates NOT because the business they are funding is credible. This arrangement is totally flawed. This probably is the reason why we have all seen or heard of business owners being sued by funders individually or collectively for defaults on their repayments.
As a Turnaround Manager for businesses since 1998, I can confidently say that high debt is a main killer in any business, even it is a “profitable” one. When a business is bleeding cash, more cash is NOT going to help. We must all understand that the bleeding of cash is an effect of a cause and if the cause is not eradicated, more cash infusion will only worsen the situation further.
We MUST find the cause of the bleed and stop the bleed altogether. There is no other way. This is the reason why in our client engagements, our first priority is to increase the cash flow and profits of our clients’ business to pay off their debts.
To us, there is no such thing as “good debt” vs “bad debt”. To us, a debt is still a debt. Just like shit. There is no such thing as “good shit” vs “bad shit”.
With this article, I hope readers will think twice before incurring any debt in your business. If you are already bleeding cash in your business, go get help to stop the leak before it is too late.