Raise money for your small business without giving up ownership or paying interest.
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.
What is rewards-based crowdfunding?
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, businesses often offer T-shirts and other swag for donations around $25. Higher donations might come with a limited-edition product in return. 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.
There’s no limit to who’s eligible to make a donation. In fact, most rewards-based crowdfunding campaigns get donations after someone saw the campaign shared on social media.
How does it work?
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 donations. 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.
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 sharable 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.
Top 3 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%, plus $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% to 5%
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%
- Processing fee: 3% plus $0.30 per transaction
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.
Benefits of rewards-based crowdfunding
Here are some of the perks that come along with this low-cost, low-risk financing option for small businesses:
- It’s inexpensive. You typically only have to pay a 5% platform fee and a credit card processing fee of 3% plus $0.30 to raise money.
- No credit check. Your personal credit score doesn’t matter when you make a crowdfunding campaign.
- No collateral required. You also won’t risk losing your business or personal assets through crowdfunding.
- Won’t lose ownership. With rewards-based crowdfunding, you don’t have to give away equity in your company in exchange for donations.
- Increased brand awareness. The marketing that goes into your crowdfunding campaign can help familiarize people with your company and products — even if they don’t donate.
What to watch out for
Thinking of setting up a rewards-based crowdfunding campaign for your business? Consider these potential drawbacks first:
- Not great for large amounts. It can be hard to raise more than $100,000 through rewards-based crowdfunding. Instead, you might want to look into business loans or equity crowdfunding.
- 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 good 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.
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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. Limiting your rewards can 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 just 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.
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.
You can learn more about how business financing works by reading our guide to business loans.