Crowdfunding For Business Basics | Bankrate

Crowdfunding for business allows you to raise capital online by gathering small contributions from backers worldwide. Instead of relying on traditional loans, you tap into public interest and draw in small investors who resonate with your project or business vision. These contributions can be donations, rewards-based investments, equity stakes or even debt financing. 

The Crowd Data Center has tracked almost 926,000 crowdfunding projects since January 1, 2014. Of those, nearly 24% were fully funded, with an average amount of $244,604 raised from approximately 347 backers, averaging $705 per pledge.

These numbers show that crowdfunding for your small business can work well when you understand the benefits, risks, and legal rules involved in launching, funding and receiving money from a campaign.

What is crowdfunding?

Crowdfunding for a business involves a fundraising campaign, which is typically time-limited. The fundraising business publicizes its efforts and requests contributions for startup costs or a specific project.

There are websites specifically for these types of campaigns. While crowdfunding websites take a percentage of the money raised as a fee, crowdfunding donations don’t have to be repaid like a loan.

Crowdfunding companies will often take on some (or all) of the vetting requirements for investors, conducting due diligence on the company’s financials, licensure and business planning. Platforms also host a space for fundraisers to publicize their projects, making multimedia and social media sharing easy.

Getting access to contributions may be an “all-or-nothing” gamble, according to Candid Learning, an educational platform focused on philanthropy. Some platforms only send you the funds if your campaign reaches its goal by the time it ends.

“Less than half of all crowdfunding campaigns reach their goals,” the organization advises, cautioning readers to educate themselves about a platform’s fine print, guidelines and restrictions before committing to an agreement.

Types of crowdfunding for business

Before launching a campaign, you must decide which crowdfunding type your business plans to pursue. There are four common types of small business crowdfunding.

Donation

You’ve likely seen donation-based crowdfunding campaigns on social media. These campaigns commonly support charitable causes, such as helping with someone’s medical bills or replacing a family’s property after a natural disaster.

The popular platform GoFundMe allows individuals and community nonprofits to raise donated funds this way.

Some businesses will seek donations through crowdfunding, especially if there is a strong local interest in the product or cause. These crowdfunding efforts do not provide anything in exchange for donated funds, and donations are typically comprised of many small contributions (as low as a few dollars per person, in some cases).

Debt

Debt-based crowdfunding operates like getting business loans from multiple lenders. Contributors will commit a certain amount with the expectation that the fundraiser will pay back the funds — usually plus interest — within an established time frame.

The microloan platform Kiva works this way, with the added twist that loans are interest-free.

Reward

Reward crowdfunding is popular on Kickstarter, which hosts creative ideas and products. These crowdfunding projects offer contributors rewards at different giving thresholds — commonly a digital badge or sticker for smaller contributions and a tote bag or t-shirt at the next level up.

Top-tier rewards for major contributors to these campaigns can be lavish: Trips, celebrity meet-and-greets or free or early-release products.

Equity

Equity crowdfunding for your small business is a standard business model for entrepreneurs looking to fund startup or investment costs. This type of crowdfunding exchanges short- or long-term equity in the project or company in exchange for an investor’s initial contribution. This type of crowdfunding for startups can be especially beneficial when accompanied by mentorship, as entrepreneurs can gain valuable insights that increase their chances of success and financial stability.

As with all crowdfunding, participants in this model run a risk — in this case, the possibility that their chosen venture may not gain value in the future. This type of crowdfunding is regulated by the U.S. Securities and Exchanges Commission.

Popular crowdfunding platforms for businesses

There are many options for new and established companies looking to source small business crowdfunding. These include:

• Kickstarter: This is a reward-based platform for creative concepts. Small businesses may use Kickstarter to raise money for projects like an innovative small appliance or an independent film.
• Indiegogo: This crowdfunding site is geared toward elevating technology projects. Past campaigns have included hovering cameras and e-bike accessories.
• StartEngine: Formerly SeedInvest, StartEngine is a crowdfunding platform for startups and private companies. With access to over 1.8 million potential investors, it provides tools, guidance, and resources to support every stage of your campaign and improve your chances of success.

Limiting your campaigns to a certain time frame can help drive momentum and create a fear of missing out that compels investors. Not all crowdfunding efforts are time-limited, though.

One ongoing crowdfunding host is Patreon, where creatives and content creators can build committed memberships of supporters. These supporters pay a monthly subscription fee in exchange for exclusive content and access to their favorite creators.

How to crowdfund for a business

If you’re looking to crowdfund, there are a few steps you’ll want to follow. Here’s how to crowdfund a business.

1. Clarify your idea and audience

The first step toward success is to decide what you’re asking contributors to fund and what audience you’ll be asking. If you’re looking to crowdfund a specific investment or project, is it something for which you’ll source broad contributions?

Knowing whether you plan to pitch to local community members or like-minded entrepreneurs worldwide will inform your campaign’s style and goals. At this stage of the planning process, you want to conduct market research to assess your competition.

2. Decide on your goals and timeline

Next, decide how much funding you will need to raise to make the project — whether that’s producing a certain product or buying a storefront — a success.

Realistically, how long will you need to publicize your campaign and raise the money? Also, consider how long is too long for potential backers to wait if they commit early in the campaign. According to research from the funding platform Kickstarter, campaigns typically perform best when the duration is shorter, such as 30 days or less.

At this stage of the planning process, you may consider what type of crowdfunding best suits your business needs.

3. Choose a host platform

After researching which platforms host projects similar to yours, be sure to comb user agreements and fine print before selecting a host site.

Different platforms will have different guidelines and requirements regarding project type, funding timeframes and what happens if you do not reach your full fundraising goal. Fees also vary by platform.

4. Tailor and share your story

The most successful crowdfunding projects for small businesses have a strong narrative behind them. Be sure to enlist the help of talented storytellers throughout your campaign. The more you can compel possible investors through background information, foundational research, and appealing multimedia content, the more likely you will reach your fundraising goals.

5. Wrap your campaign and follow up with contributors

Once you’ve ended your small business crowdfunding campaign, follow up with those who have stepped in to contribute. Whether you reach your goal or not, these investors will want to know what happens with the project next. If you promised backer rewards, deliver them in a timely manner to avoid souring your company’s reputation.

Keep good records of who contributed and at what level. Leverage the relationships you build for future business.

Pros and cons of crowdfunding for small businesses

The pros and cons of crowdfunding for your business include:

Pros of crowdfunding

Crowdfunding allows your business to gain the funding it needs without using a traditional business loan. Its benefits include:

May not need to repay

Depending on the platform and type of crowdfunding you use, you may not have to pay back the money donated to your business. This allows you to gain positive cash flow without having to worry about a monthly loan payment. You won’t have to repay the funding with donation, reward or equity crowdfunding. That said, debt crowdfunding works like a business loan and does need to be repaid.

Expand your reach to many investors

Rather than putting all your eggs in one basket, crowdfunding expands your pool of investors to many individuals. Most fully funded crowdfunding campaigns will have hundreds of investors backing them. Especially with equity crowdfunding, this means that you won’t be giving too much power to any one individual investing in your business.

Helps you build a customer base

You’re already promoting your business for the crowdfunding campaign, and people invest with you because they’re interested in what you have to offer. These investors can be a great customer base that you can sell your product or service to once you’ve launched your business.

Doesn’t use credit history

Since crowdfunding isn’t a business loan and you may not have to repay, crowdfunding platforms won’t check your credit history to determine your creditworthiness. But keep in mind that your business’s reputation is on the line.

If you’re using rewards-based or equity crowdfunding, you want to reward your investors in a timely manner by delivering on your promises. Debt crowdfunding may or may not use your credit history, but either way, it’s important to repay the loan on time.

Cons of crowdfunding

The downside of using crowdfunding for your business is that you may not receive full funding, and you’ll have to promote your campaign heavily. These and other downsides to consider:

Not all campaigns reach their fundraising goals

When crowdfunding your business financing goals, there’s no guarantee that you’ll get all the funding your business needs. According to The Crowd Data Center, about a fourth of projects receive the full funding that they were expecting.

You may want to expect your project to not receive the full funding. You can either set your goals higher than your needs, or you can try to find other funding sources to finance your business.

May pay fees to the crowdfunding platform

Some crowdfunding platforms charge fees when you run a successful campaign. For example, Kickstarter charges a 5 percent fee for all donated funds. You’ll also pay a payment processing fee of 3 to 5 percent each time a person donates to your campaign.

Kiva is a platform that doesn’t charge any fees or interest on the invested amounts, but you will need to repay the money from investors.

Will have to spend time promoting your campaign

Since crowdfunding uses many single investors, you’ll need to promote your crowdfunding campaign to everyone you know. You may spend time on social media promoting your campaign to friends, family and followers interested in your business.

Some crowdfunding platforms like Kiva also have their own network where you can promote your campaign. Crowdfunding works best when you have many connections to people who might be interested in your venture.

Your business idea may get stolen

As you’re promoting your idea to the public or to individual investors, those investors may get interested in your business idea in another way. They may try to create a similar product or service and go to market themselves. This can take away the market advantage that you may have, especially if you have an original idea not seen on the market yet.

Alternatives to crowdfunding for your business

If you don’t have the time to run a small business crowdfunding campaign without guaranteed results, there are some alternative lending products worth considering. These options include both money that needs to be repaid and funds that are yours to keep.

Grants: You may find small business grants for your industry at both local and federal levels of government. Grants must be applied for — and there will be a wait time — but the money doesn’t need to be paid back.

Business credit cards: Like personal credit cards, business cards offer a revolving line of credit. Business credit cards can have an introductory interest rate or other rewards and perks. Additionally, if you don’t carry a monthly balance, you won’t be charged interest.

Business lines of credit: A line of credit is also revolving, but it operates similarly to a loan. You’ll apply through a traditional bank or online lender who will deposit money into your account when you request a draw.

Loans: Startup business loans are also a good option for new businesses. Some lenders only require a few months in operation to qualify. Business loans are dispersed in one lump sum to give you an instant boost in cash flow.

Bottom line

Crowdfunding for your small business can be an innovative and attention-grabbing way to garner fast support for your business or latest idea. Be sure to do your homework on the front end, ensuring your effort is unique enough from any potential competition. You will also want to research your hosting platform to ensure a good fit and your funding goals to ensure they are realistic and worth the effort.

Frequently asked questions about small business crowdfunding

• Can I used crowdfunding to start a business?

  Yes, you can use crowdfunding to raise capital to fund your business startup or a specific project for your business.

• How much should my crowdfunding goal be?

  Be sure the goal for your crowdfunding project covers the total cost of your effort and any fees or commissions your funding platform charges at the end of your campaign.

• Do you pay back crowdfunded money?

  You may need to pay back crowdfunded contributions, depending on what kind of campaign you run. Donation-based crowdfunding usually operates without contributors expecting repayment; debt-based crowdfunding projects assume future repayment plus interest.