Rewards-based crowdfunding could be a good option for business owners who can’t qualify for a loan, don’t want to take on more debt or aren’t interested in giving up equity. You can use it to raise money for a project, develop a new product or even cover startup costs.
But it’s not entirely free and you might not be able to raise as much money as your business needs. It also might not be the best choice if your business offers products or services that are difficult to explain.
Rewards-based crowdfunding — also known as seed crowdfunding — is a way for businesses to raise money from fans, friends, family and anyone else interested in your campaign. With this type of crowdfunding, businesses offer a reward based on how much each person donates.
For example, a business might offer T-shirts and other swag for donations around $25. Higher donations might come with a limited-edition product. Rewards don’t have to have a huge monetary value, though. Some companies simply send out gifs, thank you notes or other low-cost tokens of appreciation to donors.
Anyone can donate to one of these campaigns. In fact, most rewards-based crowdfunding campaigns get donations after someone saw the campaign shared on social media.
To raise money with rewards-based crowdfunding, you have to first set up a campaign for your business on a crowdfunding platform. At this point, you pick a fundraising goal that you want to reach by a specific date. Some crowdfunding platforms are all or nothing, meaning that the platform returns your money to your backers if you don’t reach your goal.
From there, you set the rewards for donation tiers. Some platforms allow you to limit how many rewards you give out for different donation amounts. For example, you might give tote bags to the first 100 people who donate $25. This creates an incentive for donors to make a donation now instead of putting it off until later — when they might forget.
Make it shareable
Most successful campaigns have a compelling video that quickly explains what your project is and why people might want to donate to it. If a video doesn’t make sense for your project, try to break it down into another easily shareable format. The more people your campaign reaches, the more money you’ll raise.
How much does it cost?
Your business can expect to pay a platform fee of up to 5% of the money it raises. Most platforms also charge a processing fee of around 3% of each donation, plus $0.30.
Rewards-based crowdfunding sites for small businesses
Not all platforms are right for every business. Start by comparing these three crowd-funding sites to find the best fit for yours.
Platform fee: $0
Processing fee: 2.9%, + $0.30 per donation
GoFundMe is one of the most popular platforms for rewards-based crowdfunding. There’s no platform fee and there’s no limit to how much you can raise. You also get to keep all of the money you raise, regardless of whether or not you reach your goal.
In fact, you can access money from your campaign as soon as donations start coming in. It takes two to five days for a bank transfer to process, though you can also receive your funds by check.
Platform fee: 5%
Processing fee: 3% + $ 0.20 per pledge, or 5% + $ 0.05 for pledges under $10
Kickstarter could be a great platform for creative projects and not so great for startups. You’re required to use the funds to make something that’s shareable — like a music album, book or video game. In other words, you can’t use Kickstarter to raise seed money or grow your business.
It’s also all or nothing, meaning you won’t be able to access your funds until you reach your goal. And there are limitations on what types of projects you can finance and what you can offer as a reward. For example, you can’t finance any project related to energy drinks, gambling or financial services. And you can’t offer alcohol as a reward.
Platform fee: 5%
Transaction fee: 2.9% + $0.30
Transfer fee: $25
Indiegogo is an international crowdfunding platform that could be ideal for entrepreneurs. While it might be more expensive than GoFundMe, it can hook you up with experts that specialize in marketing, creative services, prototyping, production and distribution. It also waives the platform fee for nonprofits and socially minded campaigns.
Indigogo campaigns offer businesses a choice between flexible or fixed funding. With flexible funding, you keep all of the money you raise — whether or not you meet your goal. With fixed funding, you can’t access the funds until after your goal is reached, and if you don’t then your backers get automatically refunded.
Fixed funding. On some platforms, you don’t get to keep any of the funds you raised if you don’t meet your goal.
Exposure to competitors. There’s a chance a competitor might see your campaign and try to steal your idea.
Not ideal for all projects. If you don’t have a product that’s exciting to the general public or only work with other businesses, you could have trouble raising funds.
It’s an investment. Making a successful crowdfunding campaign can take a lot of time and effort that some businesses might not have the bandwidth for.
5 tips for a successful crowdfunding campaign
Here are a few pointers to keep in mind when starting your own crowdfunding campaign:
Do your research. Look at other successful campaigns for a project like yours. Take notes about what works — and what doesn’t — to help guide your own.
Come up with a pitch that’s short and sweet. You should be able to explain the problem your product or company is fixing in 30 seconds or less. This can help you market your campaign and create any media that goes with it.
Give limited rewards. Limit the timing on your rewards in order to encourage people to donate now instead of putting it off.
Invest in your video. Videos do especially well on social media and can draw people in the way text can’t. If you’ve never made a video before, consider hiring a consultant.
Don’t start too early. While there’s no perfect time to start a crowdfunding campaign, you might not be as successful if you don’t have a solid idea of what your product or company is going to be.
Consider a business loan instead
If you’re looking to finance your business, a business loan might be a good alternative to equity crowdfunding. You’ll maintain full ownership of your business, and the process to get funding is comparatively easy – although it could be harder to qualify.
Rewards-based crowdfunding can be an inexpensive option for creative businesses that need a small amount of funds for a project. It can also help startups raise some of their seed money. But you might want to look at other financing options if your business needs more than $100,000 or you’re looking for general working capital.
Donations-based crowdfunding is similar to rewards-based crowdfunding, except your business doesn’t offer anything in exchange for donations.
Debt-based crowdfunding is another term for peer-to-peer (P2P) lending. It’s also sometimes called lending-based crowdfunding. Here, your business fills out a loan application on a platform, which connects you with funding from investors who earn from your interest payments. You can read our P2P lending guide to learn more about how it works.
You can sometimes, though some crowdfunding platforms like Kickstarter don’t allow you to give away equity as a reward. You might want to look into equity crowdfunding platforms instead, which connect you with investors specifically looking to make donations in return for a stake in your company.
Anna Serio is a trusted loans expert who's published more than 950 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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