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How crowdfunding works for businesses

Get the financing your business needs without having to worry about interest.

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Crowdfunding can be a great resource for small businesses and startups that don’t want to take on debt — or can’t qualify for a loan. It can also be a great way to drum up business and get customers involved in your company.

There are several different types of crowdfunding that you can choose from. Which is best for your business depends on your priorities, your products and your customer base.

What is crowdfunding?

Crowdfunding is a type of financing where businesses raise money for a project with small donations from friends, family and customers. There are no credit, time in business requirements or revenue cutoffs. You just need a pitch that’s easy to explain to the public. It’s not a great option what your business does is difficult to explain or isn’t consumer facing.

While it’s generally best for funding one-off projects, you can also use it to help keep your business’s doors open during a time of crisis, like COVID-19. It’s also popular for businesses in the cannabis industry, which often can’t qualify for a loan.

How different types of crowdfunding work

Crowdfunding works by collecting small donations from a group of individuals to reach a financing goal. Usually businesses do this through a crowdfunding site, which typically charges a fee for the services.

Often customers get something in exchange, depending on the type of crowdfunding you sign up for.

Donation-based crowdfunding

Donation-based crowdfunding allows individuals, entrepreneurs and small businesses to set a goal for funding. Individuals can donate money simply to help reach that goal — without gaining anything in return.

GoFundMe is a top donation-based crowdfunding platform, with an average 2.3 million monthly users. The site allows users to collect funds regardless of whether they’ve met their stated goal. Unlike other platforms, GoFundMe doesn’t offer rewards to backers.

Rewards crowdfunding

With rewards-based crowdfunding, business owners offer donors rewards based on their donation amount. A $5 contribution might only come with a nominal thank you. But larger contributions could allow backers discounts, merchandise or first dibs on the product you’re funding.

This method of crowdfunding is great for startups that want to test their idea on the market — if your budding business can’t attract funds with the promise of a copy of your product, then it probably won’t be enticing to customers.

Kickstarter vs. Indiegogo

Kickstarter and Indiegogo are two of the best-known platforms for rewards-based crowdfunding. But they don’t exactly follow the same model.

  • Kickstarter works with a goal-based model. You set a goal at the start of your campaign that you must reach in order to receive your funding. This places more importance on setting reasonable goals.
  • Indiegogo doesn’t come with the same all-or-nothing approach. Instead, you can choose to pay a fee of up to 9% in order to receive funding whether you hit your goal or not. The upside is that you get your funding no matter what — but without a goal, you could be missing out on a motivator both for you and for the backers.

If you’re in a specialized industry, you could find smaller platforms focused on specialities like nonprofits or health care.

Equity crowdfunding

Some crowdfunding platforms allow small businesses to get funding in exchange for equity. With this model, backers can become shareholders, gaining a percentage of the potential future return. Depending on the platform, you might pay a flat fee or a percentage of the funds you raise.

Equity crowdfunding for cannabis businesses

This is one of the top sources of financing for cannabis businesses. Because cannabis is classified as a Schedule I drug, banks and other federally-insured lenders are prohibited from financing cannabis companies. Sites like Fundanna helps connect cannabis business owners with investors who give money in exchange for partial ownership of the business.

Peer-to-peer crowdfunding

Also known as debt crowdfunding, peer-to-peer (P2P) lending is closer to taking out a loan rather than raising funds. This involves raising funds from investors, which you repay plus interest over years. Platforms also often charge an origination fee, usually up to 8% of the loan amount.

The main difference between a P2P loan and a traditional loan from a business’s perspective is that P2P platforms often have more flexible credit requirements. While you likely won’t get seed money through this type of crowdfunding, you can often still qualify while your business is still in the startup phase.

How to crowdfund a business in 6 steps

Follow these steps to get started on your crowdfunding campaign.

  1. Pick a type of crowdfunding. Weigh the benefits and drawbacks of different types of campaigns before settling on one that fits your business, fundraising goal and project.
  2. Compare platforms. Look at platforms that specialize in your business, industry or type of project as well as the big names. Consider features like fees, fundraising limits and how easy it is to share and donate to your campaign.
  3. Invest in your campaign. Make a compelling video and graphics that easily break down what you’re trying to fund, why people should invest in it and what people will get in return.
  4. Set up your campaign. Often you’ll have to set up a profile, upload all of those graphics and videos you made and set a fundraising goal. And make sure to account for fees.
  5. Share, and share again. Once your campaign is live, share on social media and encourage your friends and family to do the same. And don’t be afraid to repost during after work hours – otherwise you might not reach as wide an audience.
  6. Go to the press. Draft up a press release and reach out to reporters, bloggers and other media outlets that follow your industry to spread the word beyond your social circle.

Benefits and drawbacks of crowdfunding

Crowdfunding can be a great, almost-free way to fund a project. But it’s not always a good choice. Consider these main benefits and drawbacks before you decide to set up a campaign.

Pros

  • Build out your market. Crowdfunding allows startups to build up a customer base and see what potential customers like and don’t like about your business.
  • Leverage your social network. Leverage your friends, family and acquaintances to support your project. This is great for startups just beginning to raise money for their business.
  • Access to crowdfunding communities. Popular platforms have their own following, giving you access to a wider audience.
  • Get valuable project feedback. How individuals respond to your funding campaign can provide feedback on whether there’s interest in your venture — before you bring it to the market.
  • Bring on investors. Equity crowdfunding can be a great way to meet investors who might be willing to fund your business and be an advocate for it down the line.

Cons

  • It’s not always successful. In fact, most campaigns don’t reach their goals. If you’re using an all-or-nothing platform, this means that you won’t get any money for all that hard work.
  • Donor fatigue. If you’re relying on your social circle for funding, choose projects carefully to avoid bombarding your friends and family.
  • It takes time. If you want people to back your project, you’ll typically need a sharp-looking video and enticing campaign page.
  • It’s not free. You’ll likely pay some fee or percentage to get funded. With rewards-based crowdfunding, you have to deliver the incentives you promise — while you’ll give up a percentage of your potential earnings with equity crowdfunding

Ask an expert: What’s the most underutilized aspect of a crowdfunding campaign?

Narek Vardanyan

Narek Vardanyan

Founder and CEO of The Crowdfunding Formula

Most people focus on the money that’s raised and then move on. But the most underutilized aspect of crowdfunding is the crowd itself and how important it can be for the viability of your company later on….

4 tips for a successful crowdfunding campaign

  1. Make it a game. Use lead boards, points and progress bars to make donors compete with each other to offer the most funding. This can draw potential donors in and keep them engaged.
  2. Match donations. If it’s an option, hold periods where you or an investor matches each donation during a set period of time. This can encourage people to donate now, rather than putting it off and then forgetting about it.
  3. Update your swag. Your hardcode fans already have the stuff you’ve been selling. Make new swag exclusive to your new campaign and offer limited-edition items as an incentive for the people who have been supporting you all along.
  4. Hone your pitch deck. Most equity investors platforms require a pitch deck. But any crowdfunding campaign could catch the eye of an investor. Having that deck ready makes it easy to sell your idea the public and VCs.

Alternatives to crowdfunding

If you’d rather finance your business venture in a more traditional manner, consider the following options:

  • Business loans. You’ll find business loans in all shapes and sizes, each with different terms and benefits. No matter the size of your business, you’re likely to find one that proves a great fit.
  • Business credit cards. This can be a good funding option for smaller businesses or businesses making targeted purchases. There are many types of business credit cards, including 0% APR business cards and balance transfer cards for businesses.

Frequently asked questions about crowdfunding

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2 Responses

  1. Default Gravatar
    GeorgeJune 5, 2018

    I am writing a book in English on Spanish Cava and the other quality sparkling wines produced in Spain. The project is very advanced but editorial and publishing costs for an estimated first run of 600 copies are approximately 10,000€. Would crowdfunding work for this? I have considered offering copies in exchange for funding. Thank you for your consideration.

    • Avatarfinder Customer Care
      AnnaJune 6, 2018Staff

      Hi George,

      Thanks for your question! Crowdfunding is a popular choice for authors to cover publishing costs, as is promising a copy of the book in exchange for donations. But since only around 40% of these types of projects meet their fundraising goals, it might be worth investing some time (and possibly money) into making sure that your campaign has the widest reach. Also keep in mind that this is a US-based site, so some of the platforms we discuss in this article might not be available in other countries.

      Hope this was helpful,

      Anna

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