What to Know About Crowdfunding for Your Business

If you have an idea to expand your business but don’t want to take out a loan from a traditional bank, crowdfunding may be the ideal solution. Crowdfunding minimizes the risk of taking on debt and allows business owners to access capital without placing the risk on a single investor. 

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Definition of crowdfunding

Crowdfunding is a popular technique for raising capital that involves accumulating donations in order to pay for business expenses. Businesses crowdfund projects by using social media or websites dedicated to crowdfunding, like Kickstarter or IndieGoGo. Crowdfunding relies on word-of-mouth attention and advertising in order to reach a large audience, with the goal of getting funding from potential customers before you have a product or service ready to offer.

 Related: Finding Investors: What Entrepreneurs Should Know

 

Types of crowdfunding

Depending on what you want to give investors in return for capital, you can use different crowdfunding platforms to find the type of fundraising that works best for your business.

 

Donation-based

Donation-based crowdfunding is when businesses ask for investments without offering anything in return. With this form of crowdfunding, people donate because they support the idea. Businesses that provide a social service or have a charitable aspect are good candidates for donation-based crowdfunding.

 

Rewards-based 

With reward-based crowdfunding, people can contribute a certain amount and receive a reward in return. Businesses offer everything from social media shout-outs on their company page to free products. There are usually multiple tiers of rewards, so potential investors are eligible for more valuable rewards the more they invest. For example, a t-shirt company crowdfunding their latest design might give out a free sticker to anyone who donates more than $1, and a free t-shirt to anyone who donates $25 or more.

 

Debt-based

Debt-based crowdfunding occurs when the business owner agrees to pay back investors, with or without interest. It is also known as peer-to-peer lending. Debt-based crowdfunding typically allows business owners to get better returns than they could find at a bank. Investors decide how much risk they want to take, give to businesses that interest them and can earn money on their investment.

 

Equity-based

In an equity-based crowdfunding campaign, investors receive ownership in your business in exchange for their investment. Equity-based crowdfunding is an alternative to seeking out angel investors or venture capitalists who typically require a large share of your company in exchange for financial backing. Equity-based crowdfunding allows business owners to leverage their future growth and success as an incentive for people to invest cash today.

 

Benefits of crowdfunding

With crowdfunding, you can pitch the concept of your business and ask individual buyers for investments in advance of actually producing your product. Once you have enough pledges, you can use that startup capital to build your company’s infrastructure, create a website and manufacture products. 

Setting up a crowdfunding page is also an effective way to start gaining seed money without having to apply for a major loan. You don’t need to have a network of accredited investors to be successful at crowdfunding. You also don’t have to pay back money earned from crowdfunding unless you choose a debt-based strategy, provided you give each backer any promised rewards for their donation level.

 

Additionally, successful crowdfunding campaigns help your company gain popularity and build brand recognition. When a backer invests a small amount in your company and shares the opportunity with friends, they start building a network of early adopters who are interested in your product. Pre-orders through crowdfunding also show larger, more serious investors that you have support for your concept, making it more attractive for them to invest.

 

Tips for crowdfunding success

Follow these tips to help successfully crowdfund your business or project.

 

Create a realistic goal

It’s important to have an accurate estimate of how much it will cost to send all promised rewards to donors, especially if you’re replying on donations to produce your next line of products. Consider how much capital you’ll need to keep your business running after the initial launch, and factor this into your goal amount.

Related: How To Get Business Funding: A Guide for Employers

 

Get inspiration from successful campaigns

Research what crowdfunding campaigns are most successful and what elements they have in common. Look at other campaigns in your industry for examples of perks that investors want to receive in exchange for their investment.

 

Create a video

A short video summarizing why people should invest and what they would get in return can help drive donations while also marketing your business. Your video can educate your target audience and convert them to customers who believe in your vision.

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