So you could use a little cash injection for your small business, but you’re not sure you can get a traditional small business loan. Short of winning the lottery (or draining your personal savings), what option do you have for funding?
Crowdfunding may be for you.
If you’re not familiar with the concept, crowdfunding essentially allows you to fund your business through a variety of people who want to be a part of what you’re doing. Depending on the type of crowdfunding you choose, you may need to repay a loan or provide some sort of incentive to those who invest in your campaign.
Let’s walk through the four types of crowdfunding and look at the benefits and drawbacks to each.
First, a General Look at Crowdfunding
Before we dive deeper, let me explain why crowdfunding is so important to small businesses and startups right now.
It’s expected that, by 2025, the crowdfunding market will be worth $300 billion. The average campaign is $7,000, and campaigns that can reach 30% of their goal within the first week are more likely to succeed in raising the full amount.
Clearly, crowdfunding is growing and is now a worthy contender to more traditional forms of business financing.
Four Types of Crowdfunding to Consider
If you’re sold on the idea of raising funds this way, realize that you have a few options. Surely one will speak to you louder than the others.
1. Debt crowdfunding
Just like a traditional business loan, debt crowdfunding involves raising money that you pay back. The most well-known example is Kiva. While Kiva is known for its focus on developing countries where it’s harder for entrepreneurs to get ahead without a little capital, it is also available to American-based business owners.
A benefit of platforms like Kiva is that they usually don’t look at the same factors to qualify a borrower that a traditional bank will. They care less about your credit history than they do what industry you’re in, how long you’ve been in business, and the level of risk that you present to lenders. The larger the loan you want to take out, the more qualifications you’ll need to meet.
2. Equity crowdfunding
Another option when it comes to crowdfunding involves giving investors equity in your business. Yes, it’s a little like seeking angel investment or venture capital, though a bit easier if you’re willing to put in the marketing effort to spread the word about your campaign.
Wefunder is a great example of equity crowdfunding. The site is open to pretty much every type of business, from the corner cafe to the biotech company exploring the benefits of glowing plants. There are different options for the equity someone will get in exchange for her investment, but stocks (with and without dividends) and convertible notes are an option.
The benefit here is that you set the terms about how much equity you’re willing to give up. And you don’t have to pay back a loan. If there’s a drawback, it’s that relatively few people know about equity crowdfunding as opposed to the other types, since it’s still pretty new. You may find it easier to attract investors through the other crowdfunding options.
3. Reward-based crowdfunding
The next type of crowdfunding is interesting because, rather than paying back funds raised or inviting others to share a stake in the company, you’re rewarding backers with incentives. That might be as simple as sending a thank you card for a small donation, giving early access to your product, or flying out a top contributor for a VIP day with your company.
You’ve probably heard of Kickstarter: 10 million people have funded projects there (maybe you’re one of them). Whether you’re looking for funding to help launch your video game, publish your book on feminism, release your eco-friendly shoes, or something else entirely, anyone who finds your campaign compelling can contribute.
The benefits of reward-based crowdfunding are that you don’t have to pay back a loan, and your backers who you’ll be giving exclusive access to should be pretty excited about your product and can spread the word. The drawback is that you’ll have a lot of pressure to raise funds quickly, and it can become dispiriting to get lots of $5 or $10 contributions when you really want the big bucks.
4. Donor crowdfunding
The final option to consider is donor crowdfunding. With this type, you aren’t required to pay back the funds nor provide any rewards to donors. GoFundMe is a well-known donation-based crowdfunding tool.
The appeal is obviously not having to pay back funds, so you can put the money you get to work for your business. If there is any drawback, it may be that sites like GoFundMe are primarily known for personal use, so donors may not be in the mindset of supporting businesses through these channels.
What You Need to Know About Crowdfunding
Whichever type of crowdfunding you decide is best for your business, know one thing: the success of the campaign will rely entirely on the marketing power you put behind it. Investors and donors love a good story, and you’ll need to tell that through your content on the project page, a video, and outreach through social media, your blog, email, and every other avenue possible.
This is probably the most overlooked component of crowdfunding for businesses. They think it’s easy money, they post a project, and then they are baffled when the dough doesn’t roll in. But just like anything you want to sell, you have to market it. You have to convince people to part with their money (with no guarantee that they’ll get it back, in repayment or rewards). You have to entice them to think your business is worth helping. Some people hire crowdfunding marketing experts to ensure their campaign’s success.
Pro Tip:Get a free crowdfunding cheat sheet that lists reputable platforms for the various types of crowdfunding at CrowdFundBetter.com.
But if you do put the effort into spreading the word about your campaign, crowdfunding can be an excellent resource, whether you’re launching a new product, looking to expand operations, or just trying to take the pulse of your audience.
This article was originally written on May 15, 2020 and updated on November 8, 2023.