Many entrepreneurs begin to plan their businesses and realize they need to secure more funding. Several costs impact the start of a successful business, and the average small business owner needs at least $2,000 to $5,000 in startup capital.
Some business owners find it challenging to raise funds for their new small business or startup, which can slow their momentum. Securing large sums of money from investors, loans, or grants can seem intimidating. As a result, these businesses may look to crowdfunding. With crowdfunding, businesses can secure smaller amounts of money to meet their immediate needs with less pressure.
If you’re interested in learning more about how crowdfunding can help your new business, here’s what you need to know.
What is business crowdfunding?
Crowdfunding is a means of raising money for your startup by securing small amounts of financing from large numbers of people. In other words, instead of going to banks or other financial institutions to secure loans, you ask many people to give a few dollars each to get your new business started.
Four main types of crowdfunding exist to help new businesses secure their funds:
- Reward crowdfunding
- Equity crowdfunding
- Debt crowdfunding
- Donor crowdfunding
Overall, crowdfunding is expected to generate $300 billion by 2030, demonstrating the clear benefits it offers those interested in building their businesses. The average successful crowdfunding campaign generates $28,656, meaning efforts to fundraise can directly impact getting the working capital you need.
If crowdfunding as a means of raising startup funds interests you, here’s what you should know about the major types of crowdfunding, the most popular sites for running your campaign, and how to make this strategy work for you.
Reward Crowdfunding Sites
Reward crowdfunding allows you to offer donors something in return for their donation to your business. Some businesses will offer donors a tiered reward system, where they get different types of rewards for different types of donations. For example, if you’re working to build a business that will sell custom jewelry, you might send your donors small pieces for their support.
This crowdfunding system can work well for people with creative ideas they want to sell. Using this system, you can obtain funding for your business and showcase your talents to those supporting your business. However, you’ll have to turn over part of your funds to the platform in payment and calculate the cost of the reward you send to donors when determining the net funds you can secure.
You can see a great example of reward crowdfunding with Sunny’s Bar in Brooklyn, New York. The bar was flooded after the hurricane in 2012, and the establishment turned to reward crowdfunding platforms to launch a campaign. They raised enough money to keep the bar open and repair the building.
Kickstarter is one of the most well-known crowdfunding platforms. It accepts backers from all over the world and creators looking to secure funding from many countries. The site is set up to offer rewards to people who make donations to a campaign. Creators can set up pages that highlight their mission and display their products or services along with other visuals. They then design the rewards they will offer to those who donate.
Indiegogo is based in the United States and was one of the first crowdfunding sites. Unlike some competitors, this site has a large emphasis on flexibility and doesn’t prescreen campaigns before allowing them to run. You can create campaigns with set deadlines or flexible finishes, as well.
Equity Crowdfunding Sites
Equity crowdfunding takes the idea of reaching out to investors and amplifies it to reach a crowd of potential supporters. With this strategy, donors can offer money for your organization, and in response, they get a bit of equity in your business. Depending on the platform, the people who invest in your organization can be accredited, meaning they meet certain requirements, or just friends and family who want to support your business.
Some entrepreneurs like this strategy because it offers them the ability to raise money without worrying about repaying loans when the company generates revenue. Businesses can also raise large sums of money and have it streamlined into a lump sum. On the other hand, giving other people equity in your business can mean risking investors wanting to influence business decisions. You also have to abide by legal regulations regarding company obligations to shareholders.
Crowdfunder is an equity crowdfunding platform focused on confident entrepreneurs. You need to buy a monthly subscription to use this site, which can be steep. It also only allows accredited investors, who must demonstrate they have the finances and industry understanding to invest properly.
Fundable also charges a monthly fee to use their platform. It will screen proposals before allowing them to be posted and favors businesses with an excellent business plan before using the platform. Unfortunately, if you don’t reach your funding goal, you won’t get any funds.
Debt Crowdfunding Sites
Debt crowdfunding can also be referred to as crowdlending because it takes the principles of securing a business loan and brings them to the crowdfunding strategy. With debt crowdfunding, you can secure loans through the platform, but the money you secure through the loan comes directly from individuals who decide to support your business with small loans. When you repay the loan, your lenders are also then repaid for their part in the loan.
Businesses interested in securing loans for their businesses often appreciate this approach because it’s easier and more straightforward to submit an application and secure a business loan through one of these platforms than through financial institutions, particularly for small businesses and those with little background in entrepreneurship.
On the other hand, you’ll need to plan on repaying the loan, the same way you would a traditional loan. This means this money will consist of a line item on your budget sheet until the debt is repaid.
Kiva is a microlending site that allows borrowers to secure up to $10,000 to fund their businesses. It can have longer application and fundraising periods, but it also offers businesses small 0% interest loans, making them an attractive resource for early-stage business owners.
The application process involves looking at the “social underwriting” of the borrower, meaning how they engage with their community. Borrowers looking to secure funds are asked to donate to another campaign.
Donor Crowdfunding Sites
Donor crowdfunding sites ask people to contribute to your cause without expecting repayment, reward, or equity. This strategy can work well for small businesses needing to secure startup funds and knowing they have the support of friends and family. This empowers them to bring that support together into a single source of financing they can use for their new business.
This source of funds can work particularly well for those who know they have an excellent business idea but don’t have the experience or resources that traditional institutions like to see before providing a loan. On the other hand, you have to pay a percentage to the platform for hosting your crowdfunding campaign. You also have to make sure your pitch sells your product and why people should invest in you.
For example, take City Lights Bookstore in San Francisco, California, which was threatened with having to close its doors after decades of serving the community in response to the novel coronavirus pandemic. A GoFundMe campaign helped solicit donations and generate enough revenue to keep the business going strong.
GoFundMe is one of the most well-known crowdfunding websites. People not only use it for business financing but also nonprofits and personal needs. Users fill out a page that details their story and needs, with the ability to offer updates and pictures to donors. People can support you with any amount of money, helping you work toward your goal. You’ll have to pay a payment processing fee to this platform instead of a flat monthly payment.
What are the pros and cons of business crowdfunding?
Crowdfunding offers various opportunities for startups interested in securing the revenue they need to build their businesses. However, keep in mind that there are pros and cons to this strategy. Small business owners must carefully evaluate their options.
The Pros of Crowdfunding
Crowdfunding offers emerging businesses various benefits that can help them build and launch their startups. You’ll bring together all of the communication surrounding your potential investors, creating a single platform to make your pitch and communicate with those who’ve agreed to invest in your business. You also have the means to bring together your donations, meaning that a small donation can join with others to create usable capital to nurture your business.
The campaigns can also attract attention to your emerging business. You’ll let people know about your offerings and expertise, creating momentum for your organization and extending brand reach. By gauging the conversations surrounding your product or service, you’ll also improve market research insights by seeing how people respond to your ideas, improving your ability to engage and interest potential customers.
The Cons of Crowdfunding
On the other hand, there are cons related to crowdfunding. Many people mistakenly believe that this fundraising effort will come easily, with money quickly pouring into the account. In truth, it requires a lot of effort from the entrepreneur. You have to work your network, encourage and spread the message about your campaign, and make sure that you follow through with what you promise at each milestone.
Con artists have leveraged the platform to promise projects and businesses that never materialize, meaning some people have become reluctant to invest in more businesses. You need to make sure you don’t let investors down and build their trust in your organization.
Unfortunately, crowdfunding also leaves you open for unscrupulous people to publicly attack you, regardless of whether their feedback is real or accurate. In the age of instant communication, relying on internet word of mouth means that any negative feedback can quickly dismantle a campaign.
How do I crowdfund my business?
You can crowdfund your business using any of the sites above, paying attention to the strategies that fit your organization and goals best. However, as you begin to build your crowdfunding campaign, there are steps you can take to increase your chances of success. Here are a few important ideas to keep in mind.
Capture your investor’s interest
The first big step to building a successful crowdfunding campaign lies in capturing the interest of your investor. You want to make them see why your business idea deserves their interest and donation. Fortunately, there are a few strategies to make your pitch stand out from other businesses on the site.
- Use videos and photos of your product or service to help potential donors and investors see its value.
- Create a personal message and pitch about the value of your product or service and your dream for the business.
- Use eye-catching colors and fonts to encourage people to read your message.
- Incorporate testimonials to demonstrate that you have customers interested in your product or service.
Reward your investors
Many investors will expect a reward for their donation, particularly if you use a reward crowdfunding system. Fortunately, there are plenty of ways to reward your investors that don’t have to cost you a lot of money:
- Include a small gift for particular tier rewards.
- Offer a ticket to an event you’re hosting.
- Offer the investor credit for their donation, such as a shoutout on your website.
- Provide them with personalized access to your team, such as an invitation to coffee or dinner with your team.
- Offer early access to a new product or service.
The best rewards will help donors feel good about supporting you without dipping into your funds too much. For example, an accountant might offer a discount for the next tax season, a marketing consultant might provide a free website audit, a restaurant might provide personalized tote bags, or a jewelry designer might send a small piece of jewelry.
Enlist the help of your family and friends
Let your family and friends know there are several ways they can support your business outside of donating. Sharing your crowdfunding pages on social media and letting other people know about your mission can amplify your message. The more people hear about your crowdfunding efforts, the easier you’ll find it to bring in more donations. Additionally, it’ll get your business’s name and industry in front of a wider range of people, increasing your brand recognition.
What are other funding options for small businesses?
Although crowdfunding offers an excellent means for businesses to raise funds, this strategy is not right for everyone. Some entrepreneurs might find they need funds in addition to what they can raise through crowdfunding, while others might discover that this system doesn’t work for their particular business. Here are a few other strategies that small businesses and startups can use to generate the revenue needed.
Banks and Credit Unions
Banks and credit unions can also provide funding for emerging businesses through small business loans. These loans will require a good credit score, and entrepreneurs should be prepared to pay the loan back with interest. However, these establishments provide a consistent source of funding for small businesses. Establishing positive professional relationships with a bank can benefit your business for years to come.
Business Credit Cards
Business credit cards allow entrepreneurs to take out a line of credit to support their emerging businesses. You can use the credit card funds to buy what you need for your business and slowly pay back your bills. Using a business credit card wisely can help you build a good credit score, which can help if you need a loan in the future. However, ensure you consistently pay the credit card on time.
Loans and Grants
You can also look for funds from alternate sources, such as nonbank loans and grants. Various online lenders can provide new business owners with funds with easier applications than those required by banks and credit unions. However, these loans also generally have higher interest rates than bank loans.
Venture Capital and Angel Investors
Venture capitalists and angel investors can also lend support to businesses they believe have a good chance at success. Venture capitalists will invest money from a firm into businesses they believe will provide them with a good return on investment (ROI). An angel investor is a high-net-worth person who uses their money to invest in startups they believe will succeed.
Crowdfund your startup today
If you want to build a strong business, exploring crowdfunding options can provide you with an excellent source of revenue to get started. As you consider various funding sources, see if one of these types of crowdfunding might work for you.
At ZenBusiness, we want to make it easy to organize your business and the necessary paperwork. Learn how to create a business plan and organize your ideas to prepare for your crowdfunding campaign.