Crowdfunding is a term used to describe individuals coming together to support—and directly fund—projects by other individuals and organizations. For small businesses and startups, crowdfunding can be an engine for job creation and development. Compared to other methods of raising money, crowdfunding is very new, but has nonetheless already provided many businesses with the capital they needed to jumpstart and expedite their growth and potential. What Is Crowdfunding? Crowdfunding is a term used to describe individuals coming together to support—and directly fund—projects by other individuals and organizations. Types Of Crowdfunding Types Of Crowdfunding Prospective and established small business owners can use crowdfunding platforms to jumpstart their next project, and there are four models of crowdfunding they employ to do so: Donations, philanthropy and sponsorship - Like it sounds, this form of crowdfunding involves people donating money for nothing in return. Lending - Also known as peer-to-peer lending, this model involves individuals lending a certain amount of money to be repaid with interest. Equity-based crowdfunding - The company sells shares of the company. Rewards-based crowdfunding - Anyone who donates money receives a reward, such as a discounted product or swag. Anyone with questions about crowdfunding should first decide what they’re willing to give (if anything) and how they intend to excite potential donors to invest in their company. How Crowdfunding Works How Does Crowdfunding Work For Businesses? For a business that wants to use crowdfunding to raise capital, the first step is to decide what type of crowdfunding it wants to pursue. All types are available to small businesses, but there are benefits and drawbacks to each. Businesses that want to avoid paying additional taxes may want to steer clear of a rewards-based crowdfunding campaign. While the reward is given in exchange for a "donation," to the IRS, it is a sales transaction and is considered taxable income. To start a crowdfunding campaign, you’ll need to choose a crowdfunding platform. Crowdfunding platforms revolve around a specific type of crowdfunding. They're all a little different and are often aimed at specific demographics. Once you've decided on the type of crowdfunding campaign you want to run, you will need to create a campaign page that explains what you need the money for and how you intend to spend it. Successful campaigns often provide videos to help motivate and excite donors. Do Crowdfunding Sites Charge Money? Yes, they do. The amount varies with each site, but it’s not uncommon for platforms to charge 5% or more of the total funds raised, plus a transaction fee for each donation. If you have an exact amount you need for your small business, you’ll need to calculate the fees when determining how much you need to raise. Can Crowdfunding Money be Used for Anything? Any money raised through crowdfunding must be used for the exact purpose stated to the public. Therefore, if you state that you need the money to cover manufacturing costs, you cannot turn around and use any funds raised to purchase stock or real estate. Crowdfunding Pros & Cons The Pros and Cons of Crowdfunding Consider the following pros and cons when considering using crowdfunding to fund your business. Pros: Serves as a marketing tool - Crowdfunding can be a company’s first exposure to the world and can therefore be used as a means to advertise to the general public Provides a forum for feedback on the project - It’s common for investors to provide needed feedback on a service or product they have invested in; this feedback may be essential for your company’s long term success in the market Fees are minimal - Crowdfunding platforms take only a small percentage of the funds you raise from investors Inexpensive way to raise funds - No traveling is needed to speak with investors, nor does it cost that much to establish. You can spend money to launch and run a campaign, but the amount you spend is up to you. Can make it easy to communicate to your investors - With all of your investors in one spot, communicating to them is a lot easier. May not have to give up equity depending on which type of crowdfunding campaign you choose - Equity crowdfunding is just one type of crowdfunding. Other methods don’t require selling portions of your company, which means you will be able to keep more of the profits for yourself. Is a valid alternative to bootstrapping and debt - Not too long ago companies had very few options when it came to raising money, but crowdfunding has changed that. Can create excitement over your project or product - Smart companies realize that raising money through a crowdfunding campaign is only one benefit—the other is generating buzz and excitement pre-launch. Provides partial proof of concept - While a successful crowdfunding campaign is not complete proof of concept, it is still a very good sign. Full proof of concept is only established once the product or service is launched and is financially successful Cons: Often limited on amount of funding you can raise - Companies can not raise more than $5 million in a 12-month period Exposes project to the public, risking copycats - it’s not uncommon for companies to avoid crowdfunding altogether if they are currently unable to afford a patent because some companies use crowdfunding sites to get ideas for new products Funds may be subject to securities regulation - Companies selling securities via crowdfunding must comply with all federal security laws, regardless of the platform they choose Takes a lot of work to find investors - It’s unlikely investors will find your page on their own and give you money. Successful campaigns often involve full-blown social media activity to attract attention. Takes a lot of work to create a campaign - Making a donation page, shooting a video, and filling out all of the appropriate paperwork takes more time than you may be willing or able to give. Dwindled influence of the crowdfunding model - Thanks to too many scammers, some investors have grown weary of crowdfunding altogether. Does not necessarily show proof of concept - There are many examples of "successful" campaigns that did not translate to the real world of business. Can be expensive to get going - If you contract your campaign’s creation, you may end up having to spend more than you want. Too much competition on crowdfunding sites - Just creating a campaign is unlikely to be enough, and it can take a lot of work to have your project stand. Crowdfunding Sites Crowdfunding Sites Popular crowdfunding sites include: Indiegogo Classy Seedinvest FundRazr Fundly Startengine GoFundMe Mighty Cause Kickstarter Fundable WeFunder EquityNet Patreon To choose the best crowdfunding site, decide which type of campaign you want to create and compare the fees charged on each. It’s rare for investors to scroll through campaigns. Instead, many learn about investment opportunities on forums and social media. Therefore, don’t worry too much about where you launch your campaign because everything comes down to how it’s promoted. Crowdfunding Tips Tips For A Successful Crowdfunding Campaign Like any other type of business financing, crowdfunding requires strategic thought, upfront work and a commitment to reach out to potential investors. Consider the following tips when planning your crowdfunding project. Choose the right site for you - Some sites occupy a specific niche, such as arts or nonprofits. Find the one that fits your business and your ideal donor demographic. You can run multiple campaigns at the same time through different sites, but you will want to consider how. Set a realistic target and time limit - Asking for too much or too little can affect your project’s chances of success. Create a campaign video - A personal touch—which video excels at— can pay off. In fact, projects with videos outperform those without by 125%. Post regular campaign updates - Keep supporters engaged to maintain momentum. The more buzz and excitement you can generate and maintain for your project, the more likely your donors will recommend your project to their peers. If done correctly, they may even promote your campaign for you. Connect with friends and family first - Begin with word of mouth among your inner circle, then promote your campaign on social media. Some donors are more likely to contribute if they feel the campaign is already in motion and gaining traction. Offer rewards - Supporters may be more eager to back you if you offer a small incentive. Just remember that doing a rewards-based crowdfunding campaign means you will pay tax on any money received. Crowdfunding is an exciting new way to raise money for your small business, and there are a lot of opportunities to be had. However, you may still require additional capital after your campaign ends even if it is successful. Learn more about your business funding options today at Lendio.