Hotel Crowdfunding vs. Traditional Hotel Financing: Which is Better

Crowdfunding is a relatively new option for hotels. With already existing financing options, how should you choose the best option? Luckily, we’re here to debunk everything there is to know about hotel crowdfunding vs. traditional hotel financing.

If you plan on building a unique experience, hotel construction financing will be better through crowdfunding. However, if you want to enlarge your network and gain mentorship from your investors, traditional financing options will be better for you.

Let’s dive right in and talk about all the pros and cons of hotel crowdfunding vs. traditional hotel financing.

Hotel Crowdfunding

People have not explored hotel investment crowdfunding, so it is not popular. With less than 30 hotel campaigns across Indiegogo and Kickstarter, only a little data is available to consider. There are theoretical benefits and disadvantages to consider when looking at hotel crowdfunding vs. traditional hotel financing.

Let’s look at the key pros and cons of hotel crowdfunding before we tackle the more traditional option of hotel financing and compare.

Increased Accessibility to Funding

Crowdfunding is a prevalent funding option for many types of startups, including tech, gaming, and other categories. That is because crowdfunding breaks traditional funding stereotypes and tackles the issue of funding from a more modern perspective – opening the door to not only a few investors but millions of them.

Ultimately, you can raise more funds without sacrificing too much of your business.

Diversification of the Investor Base

With hotel crowdfunding, you can raise money from millions of backers. It might make you think that you’ll only be getting funding from them and missing out on the mentorship you would’ve otherwise received from a traditional investor. However, the community of backers you build will be eager and willing to share their feedback and expertise, making the diversity of your investor base into a pro.

Potential for Marketing and Brand Exposure

When discussing hotel crowdfunding vs. traditional hotel financing, it’s necessary to remember the digital nature of crowdfunding. Platforms like Indiegogo and Kickstarter are not only sources of fundraising but sources of marketing and exposure as well.

Indiegogo alone has a 9-million-strong community, and reaching those early adopters can do wonders for your hotel idea.

Flexibility in Funding Options

There are two ways to approach crowdfunded hotel investments. Platforms like Kickstarter offer fixed financing, which means you will only receive the amount you’ve raised if you reach your campaign goal.

However, you can also choose to raise with Indiegogo, which provides a flexible payment option. With this option, you’ll receive the funds regardless of whether or not you reach your campaign goal.

Limited Investment Amounts

Since you’ll be setting donation amounts for each type of perk, with Indiegogo, you’ll be able to set 20 different levels of rewards, while Kickstarter doesn’t have this limitation. Rooms in your future hotel will usually define your perks, so this should be manageable unless you have more than 20 types of packages.

Reliance on Online Platforms and Technology

Regarding hotel crowdfunding vs. traditional hotel financing, it’s clear that one is digital, and the other is a bit more personal. When you rely on the algorithms of online platforms to make your dream come true, it seems like a disadvantage. Technology can let you down, so this is a disadvantage you should consider.

Potential Risks for Investors

When a person backs a hotel project on crowdfunding platforms, they take on a significant portion of the risk. What if you don’t build the hotel as you presented it in your 3D renders? What if they are unable to travel at the time of your opening? Since you’re selling an experience rather than a product, it brings different risks for the backers.

Now that we’ve covered the crowdfunding side let’s talk about the factors you should consider when it comes to traditional hotel financing.

Traditional Hotel Financing

Traditional hotel construction lenders have been around for decades, so we know the system works. But what’s stopping crowdfunding from knocking it out of the park? Let’s talk about the pros and cons of traditional hotel financing before we battle it out between hotel crowdfunding vs. traditional hotel financing.

Access to More Significant Funding Amounts

Hotel financing lenders have been in the game for a very long time. They know how it all works, that funding amounts must be significant, and are ready to invest. Although you raise from fewer investors, you still get a much more considerable sum than you would with hotel crowdfunding.

Higher Costs and Interest rates

Crowdfunding is way less risky when it comes to taking out a loan to make your dreams come true. This is because the possibility of taking a loss is less. Traditional hotel construction lenders have higher costs and interest rates than crowdfunding will ever have.

Related: Collecting $1.2M and Redefining Hotel Crowdfunding

Potential Loss of Control or Decision-making Power

If you’re financing your hotel by giving out equity in exchange for funding, you’ll likely lose control over important decisions. You might end up building something other than your dream hotel. While investors have more experience with such choices, your startup is still your idea at the end of the day, and it is sad to see it change too much.

Potential for Professional Guidance and Expertise

One of the most significant factors with hotel crowdfunding vs. traditional hotel financing is the professional guidance and expertise you can receive from investors. Considering that you’ve chosen your investors wisely, they will likely want to mentor and guide you in the right direction. They will be way more “invested” in your success than an ordinary crowdfunding backer would.

Now that we’ve covered the main pros and cons of hotel crowdfunding and traditional hotel financing, it’s time to get in the ring and pin them against one another.

Hotel Crowdfunding vs. Traditional Hotel Financing

Welcome to the section you’ve all been waiting for. Without any further ado, let’s battle it out and see who comes out on top regarding hotel crowdfunding vs. traditional hotel financing.

Evaluation of Funding Accessibility and Eligibility

Virtually anyone can sign up on a crowdfunding platform, create a campaign page, and start raising funding for their hotel project. The one thing left for you to do is bring backers through marketing and PR services.

On the other hand, traditional financing is not so welcoming to newcomers. You need to have a good credit history or industry experience, and the bank ultimately doesn’t find your project profitable, or else you won’t cut.

In terms of accessibility, crowdfunding is the definite winner.

When it comes to funding eligibility, crowdfunding platforms are way more flexible than traditional lenders, or investors would be. For example, Indiegogo has only a couple of criteria, one of which is to be over 18. In the meantime, traditional hotel financing institutions will require e a solid credit history, collateral for the loan, a business plan, and more.

In terms of eligibility, crowdfunding takes the cake.

Assessment of Costs and Interest Rates

Regarding platform fees, Indiegogo and Kickstarter charge 5% (considering you are successful). Indiegogo withholds these funds from you until you deliver your product. As for Kickstarter, they will only charge something if you meet your project’s goal. The 2nd cost factor with crowdfunding is the marketing aspect, which is always relative.

With traditional hotel financing, you’ll have to pay back your loan with an interest rate that depends on the riskiness of your business and other such factors. There can also be appraisal fees for collaterals, origination fees, and more.

In terms of both long-term and short-term costs, crowdfunding is a better option IF you can promote your hotel enough to reach your goal.

Examination of Flexibility and Control

Crowdfunding is sometimes called “free money” because you generate pre-orders for your product on the platform. It is a win-win situation. You remain in control of your business, and the format will be flexible.

On the other hand, traditional hotel financing comes with strings attached. If you raise money from investors in exchange for equity, you will lose a portion of your company. If you take a loan, you’ll have to pay it back eventually.

In terms of flexibility and control, crowdfunding is the better option.

Analysis of Investor Engagement and Involvement

With crowdfunding, your investors/backers are always ready to give valuable feedback to improve your hotel, but they do not control your decisions.

As for traditional investors, this usually is different. If they hold the power to make decisions, you’ll sometimes need to make changes you don’t want to. Nevertheless, you’re bound to get priceless expertise, mentorship, and feedback from industry experts who are your investors.

In the battle of investor engagement and involvement, there’s a tie between hotel crowdfunding vs. traditional hotel financing! It all comes down to whether or not you need more engaged or experienced investors.

Consideration of Risk Factors and Regulatory Compliance

Crowdfunding is well known for its low-risk factor. You need to reach your goal to get paid, but you also don’t pay the platform. Regarding regulatory compliance, each country has its laws you must follow.

On the other hand, traditional financing options involve lots of regulatory compliance, and getting lost in paperwork is never fun.

Regarding risk factors and regulatory compliance, crowdfunding is our winner.

Closure

The two main approaches to raising money for hotel development and construction are hotel crowdfunding vs. traditional hotel financing. Each of these methods has its benefits and disadvantages to consider. It’ll come down to your needs, goals, and project specifics.

From flexibility and control to funding amounts and costs associated with each option, each has pros and cons. We recommend taking all the information in and deciding which is better for your idea.