Determining a financing method that works for your small business is one of the most important things you’ll do as a small business owner. If you have inordinately large funding fees and need to raise funding, crowdfunding could be the right type of funding for you. Many small business owners have enjoyed success using crowdfunding as a financing method.
What Is Crowdfunding?
Crowdfunding is a funding method in which small business owners use an online platform to approach the public for funding. In other words, there are no middlemen involved. Traditionally, these middlemen might be a bank or other lender providing a traditional business loan, companies such as venture capitalist firms, or even wealthy individuals such as angel investors. In those cases, the middleman may dictate the terms under which you receive your money or even require that you give them ownership within your company.
On the other hand, a successful crowdfunding campaign allows you to receive money without going into significant debt or giving away part of your company.
The Benefits of Crowdfunding
A robust market. The size of the market is one of the benefits of crowdfunding. It is a relatively easily available funding source, especially for small businesses that may not attract larger investors like venture capitalists. It can also be very helpful if you lack the credit history and other requirements of a business loan.
No debt. In fact, some types of crowdfunding do not require the money to be paid back. The lack of personal loans and subsequent monthly payments can be a major advantage of this funding method.
Natural marketing boost. Crowdfunding requires that you clearly articulate the benefits of your business, in order to drum up support for it on the platform. Developing your pitch is part of it. Crowdfunding can thus be a financing method that boosts your promotional methods. A crowdfunding campaign can be your first advertising and social media campaign.
The Challenges of Crowdfunding
That said, crowdfunding has its own challenges as a funding method, too.
No guarantee. There is no guarantee that you will receive the amount of funding you request. Reaching the total fundraising goal is dependent on individuals chipping in. If they don’t, your campaign won’t reach its fundraising goal. In other words, crowdfunding is not like a bank loan, where if your application for $15,000 is successful, you’ll receive $15,000.
You may need a track record of successful projects. Some people have abused online crowdfunding platforms by conducting a fundraising campaign, and never following through. This has left some of the public wary of crowdfunding. To give them confidence in your follow-through, you’ll need to show success either in previous crowdfunding campaigns, or other areas of business.
You need to choose between the type of crowdfunding available. While some don’t require repayment, some types do. Some give crowdfunders equity in the company. This can cut down on your control of the business because those people now have a stake and a say in the business.
You need marketing know-how. A successful campaign in crowdfunding depends on the success of your pitch on the platform. If you don’t have a strong or appealing pitch, the funding is unlikely to be successful. This often means you need to know how Facebook, Twitter, and Instagram work to drive people to your crowdfunding page.
Types of Crowdfunding and Their Pros and Cons
Here’s a brief overview of the types of crowdfunding available, with the benefits and drawbacks of each.
Equity-based crowdfunding offers a share in your business to potential investors in exchange for money. The benefit of equity-based crowdfunding is that your startup costs are distributed among individual investors. The drawback is some loss of control over your business.
Whatever you do, be sure to work with a platform that supports accredited investors.
Equity ownership can also require regulatory filings with the U.S. government — be sure to consult experts about these implications.
In debt crowdfunding, the money is a loan that needs to be paid back. The advantages are that this can secure funding more quickly than a loan from a bank or other lender. The drawback is that you have to pay back the money, while other types of crowdfunding don’t require repayment.
In donation-based crowdfunding, the money is a donation that doesn’t need to be paid back. That’s a great advantage – and one of the few funding sources in which you get money without debt service obligations or sharing ownership of the business!
A potential challenge, though, is that you need a business and pitch where people are willing to donate, and not all businesses may arouse that altruism or sense of shared purpose.
Another potential drawback: donation crowdfunding sites often draw individuals who need money personally, such as people with serious illnesses who need help paying for treatment. As a result, the sites may not draw business investors so readily.
In reward-based crowdfunding, your business will give rewards in exchange for the funding. The rewards could vary depending on the amount of funding you receive.
Small amounts, such as $1, could receive a thank-you note. Medium amounts, such as $5 or $10, could receive discounts on your products or specially designed creative projects. Larger amounts may receive meetings with senior management and tours of headquarters.
Best Candidates for Crowdfunding
What companies are the best candidates for crowdfunding? As noted above, your company needs an effective pitch and articulation of why it needs the funding.
Crowdfunding depends very much on a story that appeals to investors who come to crowdfunding sites or an appealing promotional campaign that drives them to the site. If you are launching a beer with hops grown locally, for example, a pitch to the community about the excellence of local products over national ones could be very effective, appealing to hometown pride.
Crowdfunding also works best with smaller amounts of funding. Your company is also a better candidate for this method if you have flexible funding needs.
How Much Does Crowdfunding Cost?
A crowdfunding project will require payment to use the site. Platform fees vary widely depending on the site you choose, so be sure to get a sense of costs from each potential site. Rewards-based crowdfunding site IndieGoGo, for example, charges 5 percent platform fees, plus 2.9% + 0.30* forthird-party credit card fees. Fundable, which offers both equity and rewards crowdfunding, charges $179 per month in platform fees plus credit card payment processing fees of 3.5% + 30¢ per transaction.
Bear in mind that you will also need to develop a promotional campaign. At a minimum, you will need a video pitch and other materials for the platform. It’s also prudent to support your campaign with promotional materials and social media. You will need to factor in the costs of this development and ongoing outreach, too.
Steps to Crowdfund a Small Business
1) Research Crowdfunding Types
Research the various types of crowdfunding methods and determine which is best for you (debt, equity, donations, rewards). Be sure crowdfunding is the best method for you before you get started.
2) Second, decide on which crowdfunding platform to use.
Familiarize yourself with its requirements, policies, and costs. When you start a business, surprise bills can cut your feet right from under you.
3) Set a funding goal.
How much money do you hope to raise? The money you want to raise has to be tied into the pitches on the crowdfunding site. If you say the money will go toward a new headquarters, you need to use it for exactly that.
4) Develop your marketing campaign.
Determine how you’ll support the crowdfunding request. Your company website? Social media? Other types of promotional campaigns?
If you plan to support the crowdfunding request with a promotional campaign, plan that separately (but link, of course, to the date the crowdfunding request will go live). How often will you conduct promotional outreach? Through which channels?
5) Set up a profile for your business on your chosen platform.
Many platforms offer examples of successful crowdfunding campaigns on their platforms, and it can help to check yours against theirs. Most people agree that a strong presence on the platform requires a video pitch. If you don’t have a strong video presence, you may want to consider getting a friend to help you, or hiring a video production firm. Even if it’s spendy, because this is the piece of media that will be shared across the internet, it’s important to get it right.
When all of the crowdfunding site material, the promotion is ready, the funding goal is set, and the promotional campaigns are ready to go, publish the request on the platform.
After the Crowdfunding Campaign
You also need to plan and execute after the crowdfunding campaign is over.
First, create a fulfillment plan. How will you deliver all your campaign promises? Be prepared for this to be the most challenging part of your campaign. Shipping, stock management, and operations can be very daunting for people who are inexperienced. If you want thank-you notes, do you need to contract with a supplier to produce them? What should they say? If crowdfunders will get discounts on your products, how will they be notified of the product’s availability? If you’re sending a physical product/reward, how will you handle returns?
Conclude Your Crowdfunding Campaign
Conclude your crowdfunding campaign gracefully. If your request is successful, it can be a great promotional device to announce it on your personal website and thank everyone. But be sure to thank donors regardless, even if the campaign is short of its goal.
Choosing the Right Crowdfunding Website
Crowdfunding is growing, so there are many potential sites. Here are examples of the most popular crowdfunding platforms. Be sure to familiarize yourself thoroughly with the regulations and costs of each.
Sites for Debt Crowdfunding
Sites for Equity Crowdfunding
Sites for Donor Crowdfunding
Sites for Reward Crowdfunding
Let Guidant Financial Help
Guidant Financial offers funding solutions and advice for your small business, geared to your needs and type of business. We can help you step by step, from finding the right business to obtaining the best financing for your needs. Contact us today to get started.