Crowdfunding is a form of alternative finance for businesses that’s perfect for entrepreneurs, new start-ups and pretty much anyone who has a good idea for a project they want to work on. But how does crowdfunding actually work? And what are the pros and cons of crowdfunding for businesses?
In this article we provide everything you need to know about crowdfunding for small businesses, explaining the different types of crowdfunding options available and how to choose the right platform that will work best for you.
What is Crowdfunding for businesses?
Crowdfunding is a way of co-funding a project by raising funds from a large number of people.
Unlike business investments, crowdfunding for businesses typically involves raising small amounts of money from a large number of people or organisations. Depending on whether they’ve donated or invested their money, these individuals will then expect to receive a reward of some kind. This may be early or discounted access to the platform or service, product samples and trials or even a social media shoutout.
How does Crowdfunding work for small businesses?
If you’re a small business owner looking to crowdfund your business, the first step is to set up your campaign. To successfully crowdfund your business, your campaign idea should be unique and compelling. What’s more, you’ll need to provide a good incentive that will motivate people to back your idea.
You can then set up your project on a Crowdfunding platform, such as Kickstarter or GoFundMe. Potential investors will then be able to see your campaign and decide whether or not they want to contribute.
Which type of Crowdfunding is right for me?
It’s important to think carefully about the type of Crowdfunding you wish to carry out. There are a variety of options available to choose from, all of which are beneficial for different reasons and their suitability depends on your individual circumstances. Here are the 4 main types of Crowdfunding:
- Donation based crowdfunding. This form of crowdfunding is typically the most difficult, as the individual or organisation who donates the funds does not receive anything in return. Examples include charities, community projects and small businesses seeking funding from their local communities.
- Equity based crowdfunding. With this type of funding, the person contributing finance expects to receive a share of the company. This option works really well for entrepreneurs and new start-ups who are in need of some financial support.
- Reward based crowdfunding. This is one of the most popular types of crowdfunding, with campaigns using this method on a regular basis in order to raise funds for their projects. Rewards vary depending on how much an individual has invested but an example of a reward could be providing the investor with a sample product or use of your service.
- Debt based crowdfunding. This type of funding is very similar to that of a traditional business loan. An individual lends the company a certain amount of money. This will be repaid at intervals on preset dates with a predetermined interest rate. Debt based funding is best for those with good credit histories and secure revenues, however is popular amongst new business startups who don’t want to give up any equity straightaway.
What Crowdfunding platform is best for me?
There are a wide range of platforms available to choose from if you’re thinking of trying Crowdfunding. Different platforms tend to specialise in different types of Crowdfunding.
For instance, if you’re interested in debt based crowdfunding sites such as Funding Circle and Zopa might be worth checking out. If you’d prefer to go down the Reward based route, Kickstarter is a great choice, as is Indiegogo.
If you’re willing to give away a share of your business to raise funds, Equity based crowdfunding sites such as Peer Reality and Fundable can work really well. Lastly, if you’re on the lookout for donations to fund your business, websites such as JustGiving and GoFundMe are great options.
What are the advantages of Crowdfunding for business?
Crowdfunding is a great financial alternative for small businesses, given its wide range of benefits including:
- Eligibility. Unlike traditional business loans, you don’t need a good credit score to be eligible for Crowdfunding.
- Great publicity for your business. Successful Crowdfunding campaigns can gain a lot of attention online, particularly on social media. This can be extremely beneficial in raising awareness of your business.
- Low risk. Crowdfunding offers a chance of gaining valuable insights into what people think of your idea. This can end up saving the money, time and effort you might put into pursuing an idea that may not be successful.
- Equity. With most types of Crowdfunding, you won’t lose any control over your business. Your only expense will be rewarding or paying back lenders.
What are the disadvantages of Crowdfunding for business?
- No guarantees. With Crowdfunding for a business, there’s no guarantee that anyone will invest in your idea or campaign. Only 22% of crowdfunding campaigns are successful, which can be disheartening and have a real knock on your confidence.
- Costs and Fees. To set up an appealing campaign, you’ll need to invest in marketing. From compelling copywriting to eye-catching videos and graphics to publicise your project. What’s more, some Crowdfunding platforms take a cut of every successful campaign. Kickstarter, for instance, takes a 5% cut which you’ll have to give up alongside payment processing fees of between 3% and 5% – plus extra per pledge.
- Time and effort. You’ll need to dedicate time to create your campaign and publish your project, as well as putting effort into gaining exposure. This can often take a long time and will only be worth it if your campaign is a success.
- Copycats. Displaying your idea in such a public way means running the risk of someone stealing it. This is one of the biggest risks in Crowdfunding. Although if your idea is protected by a patent, trademark or copyright you won’t have to worry too much about this.
We hope this guide has given you everything you need to know about Crowdfunding for your business. If you do decide to give it a go then we wish you the best of luck in your efforts!
If you’re seeking startup funding, you may be able to get help through grants. We compiled a list of start up grants and support available in the UK