Starting your own business is hard. There are so many things to think about before you can turn your dreams into reality. You have to choose the right industry, secure all the permits and required documents, think about the manpower, and much more. But the biggest concern that most business owners face is the availability of financial funds and where to source them.
In the past, small businesses have had limited resources when it comes to financing their business. In most cases, business owners had to go to lending companies, pursue bank loans, or use their own money. With modern financing methods, things have changed, providing additional options. Today, crowdfunding for small business is so popular that it has become the primary mode of raising capital. But, is it good for your small business?
What is crowdfunding?
Crowdfunding is a form of crowdsourcing and alternative financing. It is the practice of raising small amounts of capital from a large number of people to fund a project or new business. It makes use of the wide availability of networks through social media awareness and crowdfunding websites to bring entrepreneurs and investors together. By using this technique, a business expands the pool of investors beyond the usual friends and family, increasing available funds as well.
Crowdfunding for startups works by receiving donations from various people in return for a special reward. This reward could be in the form of free products, exclusive discounts, first exposure to new products, premium merchandise, a chance to become involved with the team, or even becoming a major capital investor. Crowdfunding has one ultimate goal – and that is to raise the required amount for the project or business to take off.
There are many avenues for crowdfunding, often done via social networking sites or through a crowdfunding platform, such as Kickstarter and Indiegogo. Although many businesses and campaigns have gained success by utilizing this funding method, keep in mind that choosing the right type of crowdfunding is essential to reach your target objectives.
Types of Crowdfunding
Rewards-based crowdfunding is a type of small business financing where entrepreneurs solicit a financial donation to presell a product, service, or business concept without incurring debt or sacrificing shares. Often called non-equity or seed crowdfunding, the goal is to raise capital in exchange for a product or service. This type of crowdfunding is often used for business ventures in the creative fields such as multimedia promotion, computer software, product development, scientific research, and many similar types of business.
Rewards-based crowdfunding for small business works by introducing a project or business idea on crowdfunding sites and engaging people or possible investors to fund the venture. For example, an investor of a solar laptop charger needs at least $5,000 capital to start his business. Everyone who contributes $50 might be offered an exclusive 50% discount and those who contribute at the level of $100 might be given a free product.
This type of crowdfunding works best for small businesses with compelling ideas which don’t usually qualify for a traditional bank loan. Anyone is allowed to contribute to the campaign and most platforms usually charge 5-13% of the funds raised as well as a small processing fee.
Another type of crowdfunding for startups is investment crowdfunding or equity crowdfunding. This is a process where a large number of people provide money to a business in exchange for shares in the company. It’s like funding a small company in its early stages — and in return, you’ll get a slice of the financial pie. Unlike rewards-based crowdfunding where investors are rewarded with products, services, or other rewards, with equity crowdfunding, people pledge money to support your business in exchange for company shares.
The requirements to solicit equity-based crowdfunding projects are similar to what you’ll find in bank loans, but you won’t need any collateral because there’s no loan payment involved. Campaigns with this type of crowdfunding usually entail large amounts of money and companies should NOT be listed on any stock exchange for them to qualify. The equity can be in the form of shares or percentage ownership.
However, it’s important to note that since equity crowdfunding involves investment in a commercial trade, depending on where your business operates, the process can be subject to securities and financial regulation. The great thing about an equity-based crowdfunding campaign is that if the business becomes successful, the value goes up together with your company shares, rewarding both the business owner and the investor.
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Benefits of crowdfunding
Compared to traditional modes of capitalizing a business, crowdfunding can take business capitalization a whole new level. There are many ways to raise money and the number of potential investors is never-ending as long as you have a good pitch and a compelling business idea. Additionally, there’s no loan to repay and you avoid the high interest rates that are the nemesis of small businesses.
Social Proof – since crowdfunding is generally shared on social media networking sites, if someone shows an interest to your campaign, you’ve generated social proof to demonstrate the worthiness of your business. Trust is established even before the project starts.
Traction – all start-up companies are hungry for traction. This is when the product or services being offered have developed a great following and growth with repeat customers. Crowdfunding is the best venue to establish traction.
Marketing – crowdfunding for small business doubles as a great marketing campaign. By engaging potential supporters and growing your target audience, you are also marketing your startup. It’s like hitting two birds with one stone.
Potential investor interest – investors are always on the lookout for promising projects with great ideas. If your campaign garners enough traction and social proof, it’s more likely investors will become interested in your business, leading to an increase in capital and possible expansion.
Is crowdfunding right for your business?
Crowdfunding has proven again and again that those who want to start a small business but lack the financial resources can still make their dreams come true. But before jumping on the bandwagon, it’s best to be informed that crowdfunding isn’t all about receiving donations.
- Crowdfunding sites will usually take a certain percentage from your funds as a fee.
- A processing fee is required before you can use their platform.
- An accountant may be required to help manage your numbers.
- Large crowdfunding investments are limited to SEC-accredited investors.
- Your crowdfunding campaign is the life of your project.
To ensure successful crowdfunding for startups, make sure to:
- Present a serious business plan and great explanation of why you need the money.
- Mention that you have invested your own money into your projected business.
- Your video pitch should be short, concise, and have a call to action.
- Be active on all social media sites before and after the crowdfunding campaign.
- Don’t limit the perks and privileges, make sure that they feel like valuable rewards.
- Urge your friends and families to get involved, and to promote your campaign to others.