What Is Crowdfunding for Small Business?

What Is Crowdfunding for Small Business?

You have likely come across this article while trying to answer the question, “What is crowdfunding for small business?” While the concept has a long history, it has only been in recent years that crowdfunding has gained popular attention. In essence, an entrepreneur, small business, or anyone with an idea can raise project funding from large groups of individuals and organizations who make small money investments. These backers often pledge small amounts and will sometimes receive a reward as their return or in appreciation.

Crowdsourcing allows a person to start their dream business or project without giving away any or significant equity to third-party investors. Nevertheless, while some would consider this a free way to raise capital, it does come with some challenges. Backers are very intelligent and will carefully assess an idea’s value. So, it is often difficult to come up with an idea that generates enthusiasm and will attract funding. Backers are also very skeptical of project starters and their legitimacy.

Additionally, just like other businesses, crowdfunded projects have a high rate of failure. Moreover, there are very few regulations that protect backers. If a project goes under or turns out to be a scam, there is almost no recourse. So, backers tend to be attracted to projects that are very transparent and provide a lot of information. Nevertheless, even great ideas can fail to garner attention. Like many things on the internet, crowdfunding relies heavily on going viral.

How Does Crowdfunding Work?

The fundamental concept behind crowdfunding is democratizing capital investment. Until recently, financing of a new business meant asking a small number of people for large amounts of money. Crowdfunding flips the script. Using the power of the internet, entrepreneurs can ask thousands or millions of people for small amounts. So, if a bank or traditional investor turns you down, you can now to make your pitch to the greater public. Once the exclusive domain of the wealthy, virtually anyone can now invest in a new business venture.

This gives small businesses and entrepreneurs access to funding like never before. Furthermore, the backers can choose from investing for monetary gain to donating to a community or cause-based projects for the greater good. Regardless, a successful crowdfunding campaign will require a great idea or good cause combined with viral marketing and targeting the right crowd. A good crowdfunding campaign can also generate a lot of buzz and excitement about the launch of a new product or service.

Common Types of Crowdfunding

  • Reward-based – In exchange for their investment, a donor receives a product or service. Think along the lines of a PBS fund drive and their membership rewards. My favorites were always the Dr. Wayne Dyer giveaways.
  • Equity – In this form, the project backer is buying shares of the company. Much like buying company stocks on Wall Street, contributors are betting on a company’s future success and hoping for a significant return on their investment.
  • Debt-based – Also known as crowdlending or peer-to-peer lending, a business can receive a loan funded by multiple individuals and organizations. Typically, these types of loans provide more favorable interest rates than a traditional bank or lending institution.
  • Donation-based – While not applicable to for-profit businesses, this type of crowdfunding is fundraising for charitable causes, which can run the spectrum from helping a displaced family to starting a not-for-profit organization.

Which Are the Best Crowdfunding Sites?

Since crowdfunding is a project creator asking unknown people for money, it requires an intermediary. There are thousands of crowdfunding websites, and new ones created every day. It is important that project creators perform due diligence and use caution before selecting a platform. Different platforms will have different restrictions and fees. Additionally, success will often rely, at least in part, on the crowdfunding platform’s own reputation. Moreover, these sites are typically selective about the kinds of projects they will accept. However, even with an accepted project, your campaign may struggle because of the types of people who visit the site.

Here are some of the top crowdfunding sites:

  • Top Reward-based Crowdfunding Sites
    • Indiegogo – Initially known for funding independent films, Indiegogo allows project creators to petition funds for almost any idea, charity, or startup.
    • RocketHub – Another platform initially focused on the arts, RocketHub is for entrepreneurs, scientists, philanthropists, as well as musicians, filmmakers, and photographers.
    • Kickstarter – Launched in 2009, Kickstarter focuses mainly on creative projects such as comics, design, fashion, video, food, games, music, technology and many others.
  • Top Equity Crowdfunding Sites
    • Grow Venture Community – It is known for being one of the first platform specifically dedicated to entrepreneurs and investors. The Grow Venture Community has become a global leader in the technology used to enable banking and financial services.
    • MicroVentures – Billed as the “investment bank for startups”, MicroVentures will help entrepreneurs raise capital from angel investors. Yet, this is only after performing their own due diligence. Moreover, it is the only major crowdfunding platform registered by the Financial Industry Regulatory Authority as a broker-dealer.
    • AngelList –  While it is a platform for startups to raise money, job seekers,  and angel investors, AngelList seems to work more like a professional social network than a financial platform.
  • Top Debt-based Crowdfunding Sites
    • Funding Circle – A marketplace for peer-to-peer lending, Funding Circle exclusively focuses on small business and operates in the US, UK, Spain, Germany, and the Netherlands.
    • Lending Club – A peer-to-peer lending company, Lending Club was the first of its kind to register offerings as securities with the Securities and Exchange Commission (SEC). Even so, they provide business loans up to $300,000 and personal loans up to $40,000.
    • Upstart – Founded by former Google executives, Upstart utilizes artificial intelligence and machine learning to price credit and automate the borrowing process. However, their lending is not limited to starting or expanding a business. Also, one can apply for a loan for personal reasons, like debt consolidation or paying medical bills.

What are your opinions about crowdfunding? If you would like to talk more about crowdfunding for small business, or a related topic, please share your thoughts and questions in the comment section below.

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12 Comments on "What Is Crowdfunding for Small Business?"

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junrose123
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junrose123
I think Crowdfunding is a great way for entrepreneurs to make business out of people who wants to make an investment in their proposed business. I just find it a little bit complicated honestly, I haven’t heard anything about this before. But it was just quite amazing that entrepreneurs can now make business even without a bank loan or any other loans from any company just using this new way of source funding. I think this will provide more options to entrepreneurs who has an inability to make funds from the other sources. This is a really a good idea… Read more »
Lexa
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Lexa
Crowdfunding has helped many businesses, but there are also projects that just aren’t that well thought out. I have considered using crowdfunding for a project, but you need to do your preparation as in have a website, and social media accounts so potential investors can see how serious you are and also that you are genuine. I’ve actually signed up to a few platforms to have an account ready and there is a lot to do, not just to upload it to the site. You do need to think about what realistically you can get, plus what you can offer… Read more »
kingcool52
Member

The methods of crowdfunding that you can use may depend on the type of business/product you are looking at getting funding for as well. The only one that I knew from that list is Kickstarter, to be honest with you and I would have to say that it is a great site. I have seen a lot of various products being listed on there looking for funding and a lot of them have moved on and become hugely popular as well

Martinsx
Member
Martinsx

@Kingcool52 I completely agree with you on this, the nature of one’s proposed business goes a long in determining the kind of crowdfunding to be chosen to finance the business set up. The nature of the business would give an insight on the amount needed to establish the business, and in so doing would suggest the best crowdfunding to be used.

Martinsx
Member
Martinsx
This is really a good way for anyone with the business idea of starting up a business establishment without fund to access a reasonable amount of capital and kick off the business of his or her choice. The defining moment in this kind of business would be determined on how such business is structured in order to ensure its success and continuity in both business improvement and expansion. Crowdfunding looks promising as a means of sourcing capital for business establishment but care should be taken on the type of crowdfunding to operate from because it’s one that requires paying back… Read more »
Steve5
Member
Steve5
I agree. Crowdfunding has become a major contributor to changes in the world of young entrepreneurs. It allows people to connect and reach meaningful solutions to what would have otherwise been a difficult slope to climb. I like the idea of a great number of individuals coming together to support a worthy cause. Perhaps it works best with non-profit goals as people are more inspired to support it. While it does take luck, time, and effort, it’s still a chance for those who strive to eventually achieve something. We are all stronger as a whole. That’s why I definitely see… Read more »
Barida
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Barida

This is one of the best ways to enable one get better at making the business we have in business boom. It’s not new news that crowdfunding is one of the effective ways to seek support from the general public especially through the internet. Detailing the goals of the intended business is one major way to convince the people to support financially.

Martinsx
Member
Martinsx

Personally, I think that Reward-based crowdfunding is the most likely used among all the type of crowdfunding discussed in this article because of the benefits it have to the business owner in terms of cost of paying back. From the considerate sun invested in the business, it only requires a form of reward, probably gifts or a kind of service to be delivered to the investors.

junrose123
Member
junrose123

I think Crowdfunding should always be considered by entrepreneurs who would love to establish a certain business but lacks the capital to start with. This is a great way for the entrepreneurs for not to be worried for funding issues since they can now get funds from the different companies that they wishes to get in capital. In terms of profit sharing I don’t see any problems that my arise since I think the earnings will be equally distributed according to their terms and condition.

joey_2tep
Member
joey_2tep
Most of the entrepreneurs nowadays think that they can only raise capital from accredited investors, venture capitalists, and banks and some of them don’t realize that there is crowdfunding which is a great alternative way to fund a business, and it can be done without accumulating any debt. I think rewards-based crowdfunding platforms is better because it allows entrepreneurs to raise funds from the community in exchange for simply giving their products or other relative gifts. We all know that starting up a business is a very risky and challenging and to find sufficient funding and there are always expenses… Read more »
Haley
Member
Haley

In crowdfunding you need to have a detailed and solid Business plan to attract investors or sponsors. Its hard since you will need to convince them and make them see your vision. But if you fortunately got approved then it is a great way to promote your business as well. Even music artists that still starting up and looking for sponsors are trying their luck in crowdfunding. That is how wide Crowdfunding can help aspiring people.

junrose123
Member
junrose123

I think the best type of crowdfunding that entrepreneur should used is the reward based type wherein a certain donor would invest money in exchange for a certain product or services since this the most simple methods that doesn’t require a lot of efforts. It is the easiest and convenient method that I think would be suitable for any type of business. The risk is minimal compare to any other type of crowdfunding in the market.