Crowdfunding for Small Businesses: How it works
When you’re ready to start a business, is crowdfunding the right choice for you?
When you’re starting a business, sourcing funds from banks and traditional lending sources can be tedious. But in the era of social networking and online collaboration, more and more of businesses are using a different method to raise money: crowdfunding.
What is Crowdfunding?
Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet, rather than traditionally raising big amounts from a small number of investors.
Getting started with Crowdfunding
There are a variety of options and business models to consider when it comes to crowdfunding. The earliest iteration of crowdfunding was the donation model. With donation crowdfunding, individuals help fund a business, project, or venture with no promise of rewards or payback. Platforms like GoFundMe are dedicated solely to this type of crowdfunding and have recently helped collecting donations to the Hurricane Harvey Relief Fund.
Reward-based crowdfunding is similar to a donation, but offers incentives in exchange for funding the campaign. Platforms like Kickstarter or Indiegogo act as online middlemen between businesses and investors, to successfully raise enough money to fund projects like the Pebble watch or the Micro Drone 3.0.
Debt-based crowdfunding is a great alternative to traditional bank loan for startups. Also known as, “crowd lending” or “peer-to-peer lending,” debt-based crowdfunding often has lower interest rates and more flexibility to secure resources. Popular platforms include SoFi and LendingClub.
Equity crowdfunding offers large groups of investors the opportunity to fund startup companies and small businesses in exchange for partial ownership of a small piece of that business. This service is offered by platforms like AngelList, CircleUp and now Indiegogo.
The Benefits of Crowdfunding
Today, crowdfunding provides quick and convenient access to capital to anyone with a business idea, but there are other major benefits as well:
Flexibility: It doesn’t matter if you’re trying to open a brick and mortar store, expand your open space or increase your headcount, crowdfunding allows you to find new investments at each stage of your growth cycle. There’s no geographic limit to lenders and you have greater control over how to reward investors.
Early feedback: Crowdfunding is a great way to test the market before starting a business to see if your idea gets any traction. By interacting with potential backers and consumers you can refine your pitch and your product until it’s the perfect market fit.
Free marketing: Sharing your project on crowdfunding platforms will get you free exposure, and expand the reach of your campaign using social media, email and other channels.
Create loyal customers/fan base: When backers are involved in a campaign, they can become great advocates. Engage with your crowdfunding audience and turn them into a social media army that will spread the word for you.
Is Crowdfunding Right For Me?
Crowdfunding is a great option for many small businesses. However, only 38% of launched projects successfully reach their goals. Before starting a crowdfunding campaign, do your research and create a plan to reach potential backers.
Need help getting started? Read: How to create a business plan
About the Author
Romu Gaboriau is a Digital Marketing Manager at Worldpay US. In addition to working with successful startups, Romu has been using Inbound Marketing expertise with clients of all size in diverse industries to deliver long-term. Passionate about user experience, social media, and marketing innovation, Romu has been able to use my international background to create unique marketing visions. French is his native language and dedicated is his state of mind.