According to the business finance website Fundera, $17.2 billion is generated yearly in North America through crowdfunding, and that amount is expected to grow to $300 billion by 2030. The average total raised by successful campaigns (meaning they met their goal amount) was $28,656.
Crowdfunding appeals to start-ups and small businesses because it’s a relatively inexpensive way to infuse money into a business venture while also promoting it online to a broad audience of potential customers. However, it is not without its risks and drawbacks.
Types of crowdfunding
For small businesses, there are two major types of crowdfunding: rewards-based (sites like Kickstarter, Indiegogo, Patreon) and equity-based (Republic, Start Engine, Wefunder).
Rewards-based funding operates by offering backers (also called “donors”) a tiered system of rewards based on the amount donated. Rewards can be a physical (possibly limited-edition) product or an opportunity to weigh in on a future product’s name or design. This type of crowdfunding is most often used by small businesses to launch their idea without entering into shareholder contracts or taking out a business loan, which comes with interest and must be repaid. Rewards-based funding best supports small-dollar contribution options.
Equity-based funding involves investors receiving shares in the company based on the amount of their contribution. These investors believe the business will be successful and expect it to generate a return on their investment. This type of funding is best suited for businesses with solid growth plans. Involving investors can result in potential hiccups if strict financial guidelines aren’t followed and can result in increased scrutiny from regulators.
The website Fundable is specifically for small businesses and allows you to choose between equity- and rewards-based funding.
How to crowdfund
First, research each platform and decide which type of crowdfunding best fits your business needs and goals. Carefully review the website’s fee structure and terms to ensure you keep more of the money you raise.
Second, create a profile for your business. Include your business plan for investors/donors to read as well as an honest and moving description of your business. Set a funding goal and your rewards for each level of donation if you’re using a rewards-based platform.
Third, publish your business’s profile online through the crowdfunding platform and pour as much energy and time as you can spare into promoting the page! Post the link on your personal social media channels to spark interest. Remember, it’s up to you to launch and help sustain the buzz and interest in your fundraising efforts.
Benefits
- This avenue for financing doesn’t come with interest or a loan disbursement schedule, instead you get all the money upfront and don’t have to pay it back or pay interest on it like you would for a traditional business loan. However, you may have to create and deliver rewards, which will cost money and time to produce.
- In one move, you can achieve financing and generate buzz about your product or service. And online, viral-like buzz is some of the best marketing you can get!
- Those who invest and those who only visit your crowdfunding page can become a built-in customer base when it comes time to fully launch the business.
- Crowdfunding can be an advantageous financial tool for women business owners. According to the report “Women Unbound: Unleashing female entrepreneurial potential” from PwC and the Crowdfunding Center, crowdfunding levels the playing field for women because it opens financing to investors outside of traditionally male-dominated venture capitalist firms and plays to many women’s strength of using personal, evocative language in their pitches to foster emotional connections.
Drawbacks
- Ultimately, you don’t know exactly how much financing you’ll earn from your fundraising campaign. Depending on the crowdfunding platform you use, you might not get any money if you don’t hit your funding goal.
- It’s not a solution for long-term business financing like a revolving line of credit at a credit union.
- A business may have to set a smaller finance goal than with a traditional loan, depending on the reach of your crowdfunding marketing.
- Business owners won’t have the access to the advice and mentorship credit unions can offer small business members.
- There’s the risk a business underestimates how much money they need to deliver promised rewards in return for donations. This could open them up to lawsuits and bad buzz about the company if they fail to deliver promised goods.
- If a small business uses equity-based or lending-based crowdfunding, their competition will have access to the business plan.
Small business owners should know there’s a middle-ground option for using crowdfunding and the traditional financial resource of a local credit union: using crowdfunding as a steppingstone to jumpstart the business before securing a larger loan from a credit union.
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