Crowdfunding for small businesses is a relatively new way to raise capital. Whether you’re interested in crowdfunding for your small business or startup, this alternative method can be a viable way to pump some life and energy into whatever project you’re working on. Crowdfunding allows you to generate capital while simultaneously building excitement about your business. Here’s some helpful info to know about crowdfunding before you jump in.
Related: Handling a financial windfall
What can crowdfunding be used for?
Crowdfunding offers a way for users to raise money online for their business, startup, or personal cause. Simply put, crowdfunding can be one possible alternative to small business loans from banks and credit unions (and, in some cases, family members). Of course, there are many types of crowdfunding, but generally, the process allows users to raise money without going into debt, which is why it’s so appealing to so many small business owners who need to save every dollar they can.
Popular crowdfunding sites for small businesses
There are multiple websites out there where you can raise money online for your business, but some of the more popular ones include:
- IndieGoGo: With over $1 billion raised, IndieGoGo is chock full of resources to help your campaign succeed. You can even tap into support to help make the most of your marketing efforts.
- Kickstarter: Kickstarter can make creative projects come to life. The funding is all or nothing, meaning you don’t receive any money if you don’t reach your campaign goal.
- GoFundMe: This fundraising site has a 0% platform fee and is easy to use. Plus, you don’t have to reach your campaign goal to access your raised funds.
- JustGiving: Focused on charitable giving, companies with a focus on social justice causes can raise money on JustGiving.GoFundMe and JustGiving are donation-based platforms, whereas Crowdfunder, IndieGoGo, and Kickstarter are rewards-based. Rewards-based campaigns are one of the most popular for businesses and entrepreneurs.
How crowdfunding for small business works
No matter which site you choose, building a crowdfunding campaign generally involves three steps. They are:
- Creating the campaign
- Marketing the campaign
- Raising money with the intention of reaching the target goal. Some platforms require crowdfunders to reach their goal in order to keep any of the money raised, others do not.
Creating the campaign
The campaign phase is where you state what you’re trying to fund and why. It could be an idea for a new business, product, or even service. Many successful campaigns spend a lot of time making compelling, easy-to-understand videos about why financial assistance is needed (and why crowdfunding is their best option). They clearly state what the money will be used for and why they need the amount that they do. Generally, telling a compelling story can be an important step in creating the overall crowdfunding campaign. Frequently, crowdfunding campaigns convey the business owner’s personal story and their reason for doing what they do. This process is very similar to writing a business plan.
Marketing the campaign
Creating a crowdfunding campaign is just the first step. You’ll also likely need a plan for marketing it to reach people who may be interested in supporting your business. Your “investor” is anyone who chooses to donate money to your campaign (and who is also probably your company’s target audience). Crowdfunding “investors” or “donors” choose to fund a business or project because they want early access to a particular product, but many simply do it because they want to help.
As you may expect, this part of crowdfunding can take some work. Generally, people who donate to crowdfunding campaigns don’t spend time looking for someone or something to give their money to. They must be found and convinced of your business’s unique value. Depending on the type of business you run, some ideas to market and promote your campaign may include:
- Spreading the word on your company’s website and social media channels
- Using promoted posts on social media
- Doing interviews for online blogs, podcasts or other media
- Attending conventions, business fairs, or local community events
- Distributing flyers, pamphlets, or other promotional materials in your community
Reaching the target goal
Reaching your target money goal (or getting as close to it as you can) is the last phase to crowdfunding. Depending on which crowdfunding platform you choose, you may or may not get to keep the money if you don’t actually reach your goal. Be sure to pay attention to these details before you choose a final option. However, some companies use crowdfunding not just as a source of money, but also as a way to test the market and get valuable feedback. You may be able to find out if there’s a demand for your business and what people like and don’t like about it.
Different types of crowdfunding
As a business owner, you usually have access to four basic types of crowdfunding: equity crowdfunding, donation crowdfunding, reward crowdfunding and loan crowdfunding.
Equity crowdfunding
With equity crowdfunding, you’re usually selling a portion of your company in exchange for money at a later date. This means that whenever your company is profitable, a portion of your profits must go to your investors. This type of crowdfunding does come with some legal tight ropes to walk across, but it can be done.
Here are a few examples of equity crowdfunding companies:
- AngelList: You can create a startup profile to raise money and connect with venture capital funds on AngelList.
- CircleUp: This platform focuses on companies that sell directly to consumers. You could be partnered with investors and get help with distribution and operations.
- Fundable: You can opt for equity fundraising on this platform, although rewards-based crowdfunding is also available. Fundable recommends the equity option for campaigns raising between $50,000 and $10 million.
Donation crowdfunding
Donation crowdfunding is exactly what it sounds like. It’s when a person donates money to your crowdfunding campaign without expecting anything in return. They do so because they respect your business or cause and want it to succeed. Though donation crowdfunding sounds like the best, it may be the hardest to do well in. Generally speaking, people who are successful with this type of crowdfunding are usually with a charity or tackling a social issue head-on.
Reward-based crowdfunding
With reward-based crowdfunding, contributors receive a sort of reward for contributing money. This type of crowdfunding is also called exchange crowdfunding and the reward often varies based on the amount of money that is given to the campaign. Businesses may send contributors the new product for which they’re raising funds. One of the more famous examples of this is when the Japanese game maker Yu Suzuki started a Kickstarter campaign to raise money to develop a video game, Shenmue 3. As part of the campaign, certain contributors received a copy of Shenmue 3. He originally asked for $2,000,000, but he instead raised $6,333,295. Kickstarter, Indiegogo and Crowdfunder are three of the top exchange crowdfunding platforms.
Loan crowdfunding
Loan crowdfunding, also known as peer-to-peer lending or marketplace lending, is when a person or company seeks financial assistance from a group of people as opposed to a bank or credit union. The money is to be paid back by agreed-upon dates and interest levels. Crowdfunding business loans may offer lower interest levels than traditional loans, and there is not as much red tape to work through.
- Prosper: Prosper allows you to take out a personal loan to use for your small business. It can be beneficial for new businesses because your application relies on your personal credit rather than your business credit.
- StreetShares: This platform offers a wide range of business financing options, and provides potential investors with the ability to invest in veteran business bonds.
Do you pay back crowdfunding money?
Depending on which type of crowdfunding for small business you choose, the rules are different for what you are expected to do for your investors:
- Equity Crowdfunding: With this type of crowdfunding, investors aren’t repaid for their specific contribution. Instead, they become shareholders in the company, earning a proportionate slice of equity in the business venture. So as the company grows, you’ll be required to share a portion of your profits in dividend payments with your shareholders as long as your business is in operation.
- Donation Crowdfunding: You do not have to pay any money back received in a donation crowdfunding campaign. In this type of campaign, money is typically given without any expectation of a return.
- Reward-Based Crowdfunding: No, you are not required to pay back any money in an exchange crowdfunding campaign, but you are expected to send your funders an agreed-upon reward once it is ready.
- Loan Crowdfunding: With loan crowdfunding, you are expected to pay back any money you receive. Payback dates and interest levels are agreed upon beforehand.
Pros and cons of crowdfunding for small businesses
Crowdfunding, as with anything related to money, comes with its pros and cons.
Pros of crowdfunding for small businesses
Here are some advantages of crowdfunding:
- It can be a great way to test the market: If you have a business idea but you’re not sure if the market will respond to it or not, crowdfunding allows you the opportunity to turn it into a proven concept. However, if your campaign doesn’t reach a lot of investors or supporters, then that may be a sign you need to pivot your business strategy and idea. The market finances your business or product: You’re not typically taking unnecessary risks with your finances. Instead, the market is taking most of the financial responsibility.
- It can create buzz and excitement about your product: A successful campaign will generate awareness and excitement over your business and product, which is time and effort well spent for many reasons. It can accelerate your past competition and years of struggle. It can help you create a powerful network: Though this doesn’t happen automatically (and of course takes a lot of work), crowdfunding may introduce you to people who could help your business for years to come. It could help you raise a lot of money you would never have had access to without it: Obviously, the purpose of crowdfunding for small businesses is to raise money, but it’s possible to raise more money than you originally requested. It’s rare, but it does happen for some businesses. This is why it is so important to put everything you have into your campaign.
Cons of crowdfunding for small businesses
Here are some of the disadvantages of crowdfunding:
- It’s not as easy as it sounds: It’s a lot of work to launch a successful crowdfunding campaign. It’s not as simple as signing up and telling people how much you need. For example, many successful campaigns usually end up spending money on marketing and getting a professional to shoot their video.
- You have to find a way to reach contributors: Whatever company you use to crowdfund isn’t usually going to advertise your campaign or make sure it reaches the right investors. It can create unrealistic goals and expectations: With crowdfunding, you typically have to raise money by a certain date, so you need to set your own realistic goal. Remember that even the best of businesses need time to grow and mature. You may have competition: Depending on your industry and niche, you may have thousands of campaigns to compete against.
Alternatives to crowdfunding
Despite the diversity in the types of crowdfunding available for businesses, there are several other options to explore. More established businesses can apply for small business loans through banks and other lenders. SBA loans may also be available if you have trouble qualifying for traditional financing. If you sell directly to consumers, you may be able to qualify for a merchant cash advance, which lets you borrow a lump sum and repay it as a percentage of your cash register sales.
Similarly, invoice financing gives you an advance on unpaid invoices from your clients. Both of these options can have heavy fees and risks. Successful crowdfunding for startups and businesses is done on a routine basis. Just make sure you lay the appropriate groundwork and have a solid game plan in place before you launch.
Learn more:
This article originally appeared on LanternCredit.com and was syndicated by MediaFeed.org.
Lantern by SoFi:
This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612; NMLS number 1121636. (www.nmlsconsumeraccess.org)
All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider’s discretion. There is no guarantee you will be approved or qualify for the advertised rates, fees, or terms presented. The actual terms you may receive depends on the things like benefits requested, your credit score, usage, history and other factors.
*Check your rate: To check the rates and terms you qualify for, Lantern conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender(s) you choose will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
All loan terms, including interest rate, and Annual Percentage Rate (APR), and monthly payments shown on this website are from lenders and are estimates based upon the limited information you provided and are for information purposes only. Estimated APR includes all applicable fees as required under the Truth in Lending Act. The actual loan terms you receive, including APR, will depend on the lender you select, their underwriting criteria, and your personal financial factors. The loan terms and rates presented are provided by the lenders and not by SoFi Lending Corp. or Lantern. Please review each lender’s Terms and Conditions for additional details.
Personal Loan:
SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student Loan Refinance:
SoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lender’s receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).
Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 09/30/21. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.
Auto Loan Refinance:
Automobile refinancing loan information presented on this Lantern website is from MotoRefi. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.
Secured Lending Disclosure:
Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.
Life Insurance:
Information about insurance is provided on Lantern by SoFi Life Insurance Agency, LLC.
Lantern by SoFi September $10 Check Your Rate Promotion (“Promotion”):
The Promotion is offered by Lantern by SoFi Lending Corp. (“SoFi”). SoFi reserves the right to change or terminate this Promotion at any time with or without notice to you. No purchase necessary to participate. Additional terms and conditions may apply. Promotion is void where prohibited by state law. Auto loan refinance not available in some states, including ME, MD, NE, ND, NV, NY, PA, VT, and WI.
Eligible Participants: The Promotion is open to anyone who resides within the United States** and is of the age of majority in the state in which they reside. To receive a $10 bonus in the form of a gift card through the Promotion you must agree to a soft credit pull on lanterncredit.com to check your rate for the following Lantern by SoFi Lending Corp. (“Lantern” or “Lantern Marketplace”) product: Auto Loan Refinance. Checking your rate will not affect your credit score. If you later decide to submit an application and agree to a hard credit pull your credit score may be impacted. Participants will receive the $10 bonus gift card regardless of whether or not they are pre-qualified for a product through the Lantern Marketplace. Those who have already received a bonus for checking their rate on lanterncredit.com for a personal loan or auto loan refinance in the 2021 calendar year are not eligible for this promotion.
Promotion Period: The Promotion is available beginning on 12:00 AM Eastern Time on September 1st, 2021 and ending 11:59 PM Eastern Time on September 14, 2021. Participants are limited to one (1) bonus between the Personal Loan or the Auto Loan Refinance product per calendar year and two (2) per household.
Payout: All payouts are fulfilled by SoFi’s vendor Customer Motivators. Eligible participants will receive an email from Customer Motivators with a unique code and a link to a web page to redeem for a $10 bonus gift card.
Tax Consequences: Bonus amounts of $600 or greater in a single calendar year may be reported to the Internal Revenue Service (IRS) as miscellaneous income to the recipient on Form 1099-MISC in the year received as required by applicable law. Recipient is responsible for any applicable federal, state or local taxes associated with receiving the bonus offer; consult your tax advisor to determine applicable tax consequences.