Comparative analysis of crowdfunding and bank financing: The effect of market uncertainty

Faced with financial dilemmas, firms have long relied on bank financing as a prevalent and trusted solution. Recently, however, crowdfunding has emerged as an innovative alternative, enabling capital-constrained firms to raise funds from diverse investors. This study explores the optimal financing strategy for such firms under market uncertainty and evaluates pricing decisions across different financing strategies, including bank financing and crowdfunding. Our results reveal that under crowdfunding, market uncertainty may lead to either overfunding or underfunding, which in turn necessitates different pricing strategies. Crowdfunding is not entirely barrier-free for firms, as its accessibility often hinges on setup costs. In contrast, under bank financing, market uncertainty may hinder firms from generating enough revenue to cover the principal and interest on the bank loan, potentially leading to bankruptcy. Similarly, bank financing is also constrained by setup costs. Finally, by comparing crowdfunding and bank financing, our findings suggest that there is no one-size-fits-all solution. Firms must consider dynamic factors, including platform commission, interest rate, and setup costs, when selecting the most appropriate financing strategy. This approach ensures that the choice aligns with both the market conditions and the unique situation of firms. Additionally, in the extensions, we modify the crowdfunding financing mechanism and introduce a hybrid financing strategy designed to further alleviate financing difficulties for firms. These findings provide actionable insights for firms navigating uncertain financial environments.