In this article:

  • What is crowdfunding?
  • How to use crowdfunding to fund an online business?
  • Alternative crowdfunding options
  • Lender financing
  • Choosing the best funding option

Financing a small business can be challenging. Fortunately, entrepreneurs don’t have to navigate the process alone. There are many ways to fund a business including, crowdfunding, angel investors, and business loans.

Keep reading to learn the ins and outs of online business funding sites.

What is crowdfunding?

Crowdfunding is a popular method of raising capital that allows individuals, business owners, and entrepreneurs to receive small contributions from multiple amateur backers. Through crowdfunding, individuals or organizations can collect donations from family, friends, businesses, interested investors, and more. The contributions are typically made through an online platform that shares a monetary goal and an ideal timeline of the individual or company raising the funds. People can expand their reach from the crowdfunding platform by advertising and sharing their cause on social media and other marketing outlets.

Types of crowdfunding

There are five types of crowdfunding, but you don’t have to stick to just one. You might start with one approach, then switch to another for your next campaign. Deciding which model is right for your new business depends on your financing goals, the purpose of crowdfunding, and the industry you’re working in.

Donation-based crowdfunding

Donation-based crowdfunding is what many people think of when they hear the term “crowdfunding.” Donation-based crowdfunding is when you simply ask a lot of people to donate a small amount of money to a fundable cause. The most common reasons for donation-based crowdfunding include personal expenses, individual medical expenses, and community projects.

Reward-based crowdfunding

Rewards-based crowdfunding is another popular crowdfunding model where donors earn rewards based on the amount of their contribution. Rewards vary depending on the cause but may include free products and services, gifts, and other incentives. New startups and service organizations often choose this type of crowdfunding.

Equity crowdfunding

Equity crowdfunding, also called crowd-investing, is a form of fundraising where investors receive a percentage of ownership in the company. Equity crowdfunding is regulated by the U.S. Securities and Exchange Commission (SEC), which requires that all crowdfunding go through an SEC-registered intermediary and sets monetary limits on funds raised in a 12-month period.

Debt crowdfunding

One of the fastest and easiest ways of raising money is through debt crowdfunding, also called peer-to-peer (P2P) lending. In this model of crowdfunding, cash is collected with the promise to pay them back later. It is a common source of funding for businesses that need working capital, but don’t want to give away equity.

Real estate crowdfunding

This type of crowdfunding attracts investors that want to put their money into real estate without a traditional bank loan and share ownership in a large piece of property, like an apartment building. Payouts are made based on revenue in regular intervals to investors.

How to get crowdfunding to fund an online business?

Crowdfunding has been becoming more popular since 2012 when the JOBS Act was passed with the intention of easing the burden of funding small businesses. The law encouraged small business owners to consider investment crowdfunding and opened opportunities for many innovative crowdfunding platforms.

To explore crowdfunding as a type of business financing, it is important to understand what crowdfunding platform is the best fit for you. Crowdfunding platforms attract potential investors looking for new business ideas and connects them to fundraisers. Most sites charge a fee for raising funds, so you’ll want to carefully review the terms before signing up.

Alternative options

Some business owners prefer to take a direct approach to fundraising by connecting with venture capitalists, friends and family, or angel investors.

Venture Capital

Venture capitalists are private equity investors that put capital into new businesses in exchange for equity. Venture capital is most often used for established businesses that are looking to grow or build a brand for their products.

Friends and Family

When starting a new business, some entrepreneurs ask friends and family to invest. Most often, this type of transaction is handled like an informal loan or a gift. Borrowing any amount of money from friends and family can put a strain on your personal relationships and leave you vulnerable to legal trouble, so be sure to research your financing options first.

Angel Investor

Angel investors contribute funds to a new business to acquire convertible debt or ownership equity in the company. They must be accredited investors, as defined by the U.S. Securities and Exchange Commission.

Funding a business with lender financing

While many entrepreneurs and small business owners are turning to crowdfunding to finance their projects and companies, there are other sources of business financing. Whether funds are needed to get your startup off the ground, expand an established business, purchase equipment, or cover operating expenses, there are many funding options available for business or personal loans.

SBA Loan

SBA loans are a great option for borrowers that are looking for low-interest rates, can meet the strict approval requirements, and have time to wait on the application process. The loans are partially guaranteed by the U.S. Small Business Administration (SBA) but are issued and funded by lenders, like Biz2Credit.

Business Loan

With business loans, the borrower receives a lump sum of cash up front and pays back the loan with set repayment terms. Small business loans are a great option for businesses looking for flexible financing for large purchases or to supplement cash flow. Borrowers with all types of credit history find term loans as a viable solution, although some require a down payment, collateral, or personal guarantee. 

MCA

Merchant cash advances (MCA) offer a fast-funding solution for businesses that need a large sum of money but do not have the time or the creditworthiness to get approved for a term loan or SBA loan. The loan is secured with future credit card sales and regular payments are made based on a predetermined percentage of the sales.

Line of Credit

 A business line of credit is a type of financing where the borrower is approved for a certain amount of credit for a predetermined time. Borrowers can take out the entire sum all at once or make a series of withdrawals up to the credit limit, similar to business credit cards. Interest is only paid on the value of funds currently withdrawn. When the balance is paid down, the borrower is free to withdraw the funds again.

How to choose the best funding option

Deciding what type of business financing is right for your business will depend on the circumstances surrounding your need for capital.  Ask yourself some of the following questions about your business to determine which funding option to start with.

  • Are you willing to exchange ownership equity for capital? Equity crowdfunding or a venture capitalist may be good funding options.
  • Does your business have an established credit history? Try a business line of credit, term loan, or SBA loan.
  • Do you need the funds fast? Get fast funding with a merchant cash advance or friends and family loan.
  • Is your company in its early stages? A business line of credit or a gift from friends and family can help you get the business going.
  • Are you looking for flexible repayment terms? Check out crowdfunding or a term loan where you can choose the right terms for your business.
  • Is your credit score a concern? Try an angel investor, reward crowdfunding, or MCAs.
  • Do you have a great business plan? Reward-based crowdfunding or a business loan are ideal options.

Final thoughts

Crowdfunding is a great source of financing for many individuals and types of businesses. It allows the business owner to set the financial goal and choose which type of crowdfunding will work best. Unfortunately, it’s hard to raise substantial cash with crowdfunding. Thankfully, there are other financing options available like a business loan or merchant cash advances.

If you aren’t sure which funding path is right for you, consider trying a combination of financing methods. Maryam Zadeh, a New York City fitness entrepreneur, needed fast cash to secure studio space for her workout classes. She was able to raise $3,000 with crowdfunding and then turned to Biz2Credit to help her get an additional $12,000 in only 48 hours.

The first step in achieving big business goals, as Ms. Zadeh did, is to figure out how much funding you will need and research possible financing options. To speed up the process, you may want to work with an online lender to compare many funding sources in a short amount of time.

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