Crowdfunding has become a popular way to raise money for small businesses. The idea is that small businesses can use crowdfunding as a platform to generate funds and expand their business without taking on the financial burden of doing so themselves. As we will see, there are both benefits and disadvantages to using small business crowdfunding.
- Why Small Business Crowdfunding
- What is Small Business Crowdfunding?
- Different Types of Small Business Crowdfunding
- Donation Model Crowdfunding
- Reward-Based Crowdfunding
- Equity Crowdfunding
- Crowd Lending
- How Can Small Business Owners Use Crowdfunding Monies
- How Smal Business Crowdfunding Works
- Create a Crowdfunding Campaign
- Market Your Campaign
- Raise Money
- What are the Benefits of Small Business Crowdfunding?
- What are the Disadvantages?
- Why is Crowdfunding Good for Startups?
- Is Crowdfunding Right for Your Business?
- Is Crowdfunding Free Money?
- Are there other options?
Why Small Business Crowdfunding
In the past, small businesses have been able to secure funding from banks or other financial institutions. Today, however, small business loans are more complicated and more costly for small companies to obtain. Banks want a more significant return on their investments which means that they will only lend money out when little risk is involved.
Small Business Crowdfunding allows businesses to secure funding without having the burden of debt or equity ownership. While small business loans can be difficult and expensive to obtain, small business crowdfunding is accessible with minimal barriers preventing businesses from receiving funds (i.e., internet connection). It also requires less paperwork than traditional bank loans.
What is Small Business Crowdfunding?
Small business crowdfunding allows businesses to use small contributions from many people to finance their business. This is done through online platforms where small businesses can post information about themselves and what they are trying to accomplish and the minimum needed for startup costs or expansion efforts.
The odds of getting approved via crowdfunding are higher than small business loans since the small businesses provide a clear goal for investors. This is in contrast to small business loans, which usually require extensive paperwork and where small companies must meet certain credit restrictions before they can be approved.
Different Types of Small Business Crowdfunding
There are four different small business crowdfunding options small businesses have access to:
– Donation Model
– Rewards-Based System
– Equity Crowdfunding
– Crowd Lending
Donation Model Crowdfunding
This type of small business fundraising is the most common. It works with a “give what you can” basis, meaning that small business owners post their projects on an online platform where small-scale investors can choose to contribute small amounts of money in exchange for rewards (i.e., T-shirts, product samples).
This works similarly to donation crowdfunding, except that small businesses offer backers some reward or perk when they contribute. For example, small business owners may offer early-bird discounts, or small business owners may create personalized rewards.
This small-business crowdfunding model is the most complicated since it involves small businesses raising funds for growth and sharing equity with backers. It works by small companies offering shares in ownership of their company to potential investors that provide the capital investment to grow and expand their business. In return, the business will execute a business loan.
This is where investors come together and provide a loan for a business venture. As the business owner, if you decide on debt crowdfunding, you will be taking on debt in the form of a business loan.
How Can Small Business Owners Use Crowdfunding Monies
Crowdfunding offers numerous ways for business owners to utilize crowdfunding. Some businesses, for example, use the funds to create new products or services, where others may use it to expand their existing operations (i.e., open up a second location). Always be clear to investors what the raised funds will be utilized for.
How Smal Business Crowdfunding Works
Whichever platform you decide on, there are a universal process businesses follow:
-Create a Crowdfunding Campaign
-Market Your Campaign
-Raising Money (Each platform has rules on goal achievement and keeps raised monies if you do not reach your goal).
Create a Crowdfunding Campaign
When it comes to raising money, there are four distinct phases: pre-launch (campaign), launch, and post-launch. The pre-launch (campaign) phase is when you explain what you’re attempting to raise and why. It might be a new business idea, a product, or even a service. Many successful campaigns spend significant time creating a compelling story, called a “pitch.” This is where you’ll explain what problem the campaign will solve and why your business should be funded.
Market Your Campaign
After you have created your compelling campaign, you will then market it on various platforms where small-scale investors can view and choose what projects they want to invest in. This includes marketing through social media, email lists, websites/blogs targeted at potential crowdfunding backers.
Reaching your money goal is the last phase of your campaign. Depending on the crowdfunding platform you use, you will either keep all the money raised if your goal is met, or you’ll receive a percentage of what was pledged if your goal wasn’t reached. This process can take anywhere from days to months, depending on how successful your campaign and marketing efforts are (i.e., reaching out to friends and family who may pledge first).
If small businesses can find the right crowdfunding platform, you’ll discover that small-scale investors are passionate about helping small companies succeed and gain traction. It’s a terrific way to get your small business off the ground quickly and reach new audiences who may not have known you existed before.
However, there is always risk involved in any investment, and business owners must be careful when choosing crowdfunding platforms. It would be best to look for a platform with the experience, transparency, and lowest payment processing fees possible to help your small business grow.
What are the Benefits of Small Business Crowdfunding?
There are numerous benefits small businesses can enjoy when using small business crowdfunding.
– Crowdfunding helps small businesses get started with minimal barriers
– Businesses can secure funds without having to incur debt or giving up equity ownership in the company. This means that small businesses receive money for their project while still maintaining control of it.
Crowdfunding also provides small businesses with the potential to expand their small business. By using small-scale investors, small businesses can quickly raise funds for all kinds of projects and activities that they want to accomplish (i.e., crowdfunding for small businesses).
What are the Disadvantages?
Small business owners should keep in mind that there are also disadvantages to small business crowdfunding.
– small businesses do not receive funds until their project is fully funded
– small business owners are responsible for providing rewards to small investors who contribute money towards the campaign (i.e., if they don’t reach total funding)
– small companies must work with third-party crowdfunding platforms that take a percentage of funds raised as commission.
Why is Crowdfunding Good for Startups?
Businesses that are just starting have one thing in common, and that is a lack of capital. The small business crowdfunding option is perfect for companies that need to raise money but do not have readily available assets or funds.
Crowdfunding helps small businesses get started by providing them with a pool of small investors who can provide funding through small contributions in exchange for rewards (i.e., T-shirts, product samples).
Is Crowdfunding Right for Your Business?
It all depends on what you are looking for. Small business crowdfunding is the right choice if small businesses are looking to raise funds from a large pool of small investors while maintaining complete control over their company.
However, suppose your small business needs funding and doesn’t have time or energy to create a campaign that will attract many small-scale investors. In that case, it may be best to consider other small business financing options.
Is Crowdfunding Free Money?
No, it is not.
Crowdfunding does come with a cost. In most cases, small-scale investors expect something back in return for their contributions (i.e., rewards or perks). The better the perks small businesses offer investors, the more likely backers will contribute to their small business.
Also, third-party crowdfunding platforms will take a percentage of funds raised as “commission” which should be part of their business plan listed on the crowdfunding site.
Are there other options?
Yes, small businesses have several different financing options for starting and growing their companies.
One option is microloans offered by community banks or credit unions that require a minimal amount as collateral but provide small businesses with loans that can help them sustain or grow their small business.
Another small business financing option is peer-to-peer lending which provides small companies with funds via online platforms for small borrower investment at better rates than credit cards but also comes with fees and interest on the borrowed amount.
Other options include small business lines of credit, small business loans, and even small business grants to help small businesses secure funds.
It’s no secret that small businesses are struggling. Small business crowdfunding is perfect for companies that need to raise money but do not have readily available assets or funds.
This small business financing option provides small businesses with a pool of small investors who can provide funding through small contributions in exchange for rewards (i.e., T-shirts, product samples).
There are several disadvantages to small business crowdfunding as well though; they include: small companies do not receive funds until their project is fully funded, they are responsible for providing rewards to small investors who contribute money towards the campaign (i.e., if they don’t reach total funding), and small companies must work with third-party crowdfunding platforms that take a percentage of funds raised as commission.
In the end, small business crowdfunding is suitable for small businesses with time and energy to create a campaign that will attract many small-scale investors. Still, it may not be the right choice if your small business needs funding and you don’t have either one.
Other small business financing options small businesses have included small business loans, small business lines of credit, small business grants, and even microloans.
Small businesses should explore all their financing options before using small-scale crowdfunding, as it comes with costs.