The number of startups and small businesses which are turning to crowdfunding is ever growing. There is a variety of different options available, and the one that is best for your business will be dependent on many factors. As a modern alternative to traditional business financial funding, crowdfunding platforms offer numerous benefits that entrepreneurs are keen to take advantage of. As crowdfunding becomes more common for those looking for ways to raise money for startup costs, equipment financing, or premises deposits, it may be time that you looked closer at the benefits.
What is Crowdfunding?
There are numerous different types of crowdfunding available today. At its most basic, crowdfunding is a way of raising funds by sourcing smaller contributions from a larger number of lenders. It prevents business owners from borrowing a lump sum from an individual lender. That’s why crowdfunding has been dubbed the ‘democratic way’ of funding a business. What’s more, it’s one of the fastest growing alternatives to traditional loans. One of the many benefits of crowdfunding is that it can be used for any number of projects. These can include:
- Selling business equity
- Borrowing money
- Selling pre-orders for an as yet unavailable product
- Charity fundraising.
The Three Types of Modern Crowdfunding
Currently, there are many variations of crowdfunding options available, but there are three that are most commonly seen. These are:
Donation and Reward: This is by far the form of crowdfunding that the public is most aware of. Usually associated with charities and creative projects, people donate money because they believe in the cause or the product. Fundraising via crowdfunding is becoming the most significant trend in the charity sector and requires no investment return or rewards for donations.
In contrast, if someone has a creative project listed on a crowdfunding platform, then there are usually incentives for donations. It can be a special limited offer that will improve the more that you donate. This type of crowdfunding is not specifically designed for businesses hoping to raise money for their business launch or peripheral expenses like industrial equipment financing.
Peer-to-peer lending: Known as P2P, this allows businesses to borrow money from a wide variety of sources. Individual lenders are then paid back with interest. The platforms that are set up for this form of crowdfunding actually act in a very similar way to traditional banks. They use an underwriting team to assess your eligibility, and they evaluate risks for those that do lend. It is very similar to a basic unsecured business loan. However, some P2P lending platforms have introduced a bidding element to the process, which allows those wanting to lend to enter a bid on your project. This can often lead to much better interest rates.
Equity Crowdfunding: This is very similar to P2P lending, but rather than repayments, lenders are given equity in your business. It introduces a higher level of risk for lenders, especially as there is no time limit on when they can expect any return. The rewards can be substantial of course, especially if a company then goes on to become a global success. This form of business investment is ideal for those business owners who aren’t eligible for a business loan or are concerned about their ability to make repayments. For large expenses like deposits on office space or financing a business acquisition, this is often a beneficial way forward. However, this is not an option to consider if you do not wish to give up equity in your business.
“You must always be honest with your backers about what you do and why you do it.”
Mihail Klenov, Half Bikes
Pros and Cons Of Crowdfunding
If you’ve been looking at crowdfunding options for your business, then you will need to consider these facts. Crowdfunding has a positive reputation, but there are flaws in the format. Knowing the pros and cons will, of course, give you a far greater decision-making awareness.
Advantages of Crowdfunding
- Fast fundraising and a lack of upfront fees.
- Crowdfunding has been called marketing that pays for itself, as you need to spread awareness of your project in order to find backers.
- Feedback and guidance on how to improve your project can be highly valuable.
- Tests the audience reception of your product or business idea.
- Transparency means that investors can see where their money is at all times.
- The diversity of investors is much broader than more traditional routes.
- Investors will usually become customers.
- Your credit score is irrelevant.
“Do your Homework. Trying to throw together a campaign in a few days and thinking that you will shoot the moon is highly unlikely.”
Chris Muscarella, Field Company
Disadvantages of crowdfunding
- You may not get the backing you require that will release the funds that have been pledged.
- It can be a lot of work to build interest in your project and will mean an investment of both time and money.
- If your project fails to reach its target, then you may damage your reputation and the reputation of your business.
- If your idea or project is not protected by copyright, someone may steal your idea.
- Mismanagement of the rewards or equity that you offer could mean that you end up paying back for more than you thought
Before you commit to a crowdfunding strategy to finance your business needs, consider alternative options that may suit your needs more completely.
Crowdfunding and Millennials
People in the age range of 24-35 are far more likely to contribute financially to a crowdfunding project. There are more of that age group donating to projects than any other. There are some self-explanatory reasons why that is.
- Social Media: The fact that millennials were already teenagers when social media platforms become so huge has meant that they already live much of their lives online. It means that they will be exposed to the crowdfunding projects of the friends and family on a regular basis, and will be more than familiar with the concept.
- Support networks: Even though millennials are among the youngest members of the workforce, they are also increasingly juggling family life, in higher education, or working full-time. It gives them a limited window in which to socialize. Crowdfunding offers them the opportunity to support the passions of their friends. Even those that are unable to contribute financially are likely to share projects on their own social media pages.
- Lack of options: Millennials have not been working for many years, and as a result, they are less likely to have access to vast savings accounts. It means that if they have big ideas for the future, then they need to source money somewhere. Social media makes it easier than ever to get their friends involved with marketing efforts, and for those willing to work hard on the projects, it is becoming an increasingly viable way to explore their dreams.
Crowdfunding is not for every business. Yet it is becoming more visible. The real estate industry is looking for ways to utilize it, couples are using crowdfunding platforms as wedding registries, and big business is using them to test product viability. If you’ve been looking for ways to create funds, then it might be time to take a closer look at how crowdfunding could be working for you.