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What are the Pros and Cons of Crowdfunding Your Small Business?

Crowdfunding your small business is one surefire way to find out whether your customer base believes in your business idea. It’s very accessible financing — no need to be eligible for a bank loan or other traditional types of funding. And it works on your timeline; you can run a fundraising campaign when you have a new business or new products or services in the pipeline, or when you need working capital.

One of the most appealing features of crowdfunding is that virtually any entrepreneur can do it. Even Hollywood executives are using crowdfunding platforms to finance film projects. For example, in 2013, director and screenwriter Rob Thomas was able to raise over $5 million on Kickstarter to finance the Veronica Mars movie.

There are two main types of crowdfunding campaigns: Rewards-based and equity-based. Just as there are pros and cons of crowdfunding as a way of raising funds, there are pros and cons to each type of crowdfunding campaign. Make no mistake, both are a lot of work. But so is any way of reaching a funding goal.

Rewards-Based Crowdfunding Campaigns

As the name suggests, this type of crowdfunding campaign involves offering investors, also known as backers, incentives to donate to your project. You can offer different tiers of rewards based on how much money a person donates. Someone who donates $100 might get merchandise like a t-shirt with your logo on it, while someone who donates $1,000 might get exclusive access to try your product first. KickstarterIndiegogo, and GoFundMe are some of the most well-known rewards-based crowdfunding platforms.

Pros of rewards-based crowdfunding

  • It reaches a huge audience, and if you get a lot of interest in your product, you’ve confirmed your market.
  • You don’t have to give up any control over your project — no swapping equity for donations.

Cons of rewards-based campaigns

  • You have to make sure you set a realistic campaign goal: Rewards-based crowdfunding works in a way where the sites are “all or nothing,” if you don’t meet your campaign goal, you don’t get anything, not a single penny.
  • If you successfully raise the amount of money you need, you have to follow through on providing the rewards to your investors. If these are tangible rewards (an actual product or service), you’ll have to set up a production and distribution system, additional workers to do the packing and shipping, etc.

Equity Crowdfunding Campaigns

In equity crowdfunding, people invest in your business in exchange for equity in the company. Unlike rewards-based crowdfunding, your contributors don’t receive a physical product or service; instead, they are banking on your company’s future success in order to get a return on their investment. Fundable and Crowdfunder are two crowdfunding websites that are specifically made for equity crowdfunding.

Pros of equity-based crowdfunding

  • You have access to more capital. Your contributors know that — in theory — the more they invest, the greater return they’ll get, so they have an incentive to make larger donations.
  • There’s potential for rapid growth. Since your investors are making larger donations, you may be able to meet your goal faster.

Cons of equity crowdfunding

This type of campaign comes with some serious downsides:

  • It’s a complicated process. This type of crowdfunding has a lot of rules and regulations and is similar to a bank loan in terms of requirements.
  • Lack of control. You’re giving up part of your ownership and will have to listen to your investors, even if you don’t like what they have to say.
  • It’s expensive. You generally already need to have a decent amount of capital in order to start an equity-based campaign, so this sort of campaign might be better suited to companies that raise capital regularly.

No matter which type of crowdfunding is right for your small business, if you want to have a successful campaign, you’ll need to keep several things in mind.

  • Carry basic insurance policies. This may seem like an odd tip, but if you’re serious about being a business owner, it’s a necessity — and it will prove to your investors that you’re in this for the long haul. Companies like CoverWallet make it easy to get insurance online.
  • Make sure you have a clear and concise business plan. You may have a great vision for your company, but no one will invest in it if they don’t see a plan to ensure its success in the future.
  • Use social media to bring attention to your campaign. Enlist your family and friends. Have them share your business story and crowdfunding campaign on all their social media accounts. This will help you reach a large number of people and potential investors.
  • Keep your donors updated, and be honest with them. Your investors should be informed of your progress every step of the way, and if things aren’t going to plan, they deserve to know. Maintaining transparency in startups and small businesses is the key to a good business relationship.

Raising capital for your business doesn’t need to be an agonizing process. The digital age has made it easier than ever to reach potential investors, and crowdfunding can be one of the easiest ways to raise business funding. A successful crowdfunding campaign is not a get-rich-quick scheme; it requires serious planning and diligence. It’s not necessarily the right way to raise money for every company. So do your due diligence, review your business plans, and make sure you have a realistic vision in mind to ensure your small business’s success. If you think crowdfunding could be the right move for you and your business, check out our in-depth article on the future of crowdfunding and the direction it is heading towards.

Emily Lazration is the Content Marketing specialist at CoverWallet, a tech company that makes it easy for businesses to understand, buy and manage commercial insurance online.

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