- It takes money to run a successful business, which can be especially hard when you are a small business and lack investors.
- Fortunately, crowdfunding is a way for small businesses to effectively secure funding.
One of the keys to running a successful business is finding your customer’s need and filling it. Or better yet, seeing a need that they didn’t know that they had, and providing them the answer. In other words, staying ahead of the game.
However, it takes money to run a successful business — which can be especially hard when you are a small business and lack investors. Fortunately, you have things options: stand in line at your local bank and beg for it or find a method to earn it yourself. If you prefer the second option, crowdfunding is one method that many small businesses have found success in.
What Is Crowdfunding?
Usually, when a business lifts off the launch pad, it only has one or two investors. Most times, the main investor is the person in charge of the business and dumping all of their life savings into it.
When you talk about crowdfunding, it lifts the burden off the few and spreads it out over a larger group of individuals and interested parties. It makes it a collective effort to reach a common goal, the success of the business venture.1
Different Types of Crowdfunding
The wonderful thing about crowdfunding is that there is more than one way to reach the goal of the business owner. This provides greater chances of success and the opportunity for more to become involved and invested in the business owner’s vision. The more who become involved, the greater chances of success the project will become.
These are the types of crowdfunding that are available to investors:
- Equity Crowdfunding: With equity crowdfunding, the owner usually puts up business shares to investors depending on the amount of funds they invest in the business venture. These investors essentially become part owners of the small business.
- Debt Crowdfunding: As insinuated in its title, debt crowdfunding is when money is borrowed for the business venture, then returned to investors after the business goals or benchmark is reached. The money is usually returned with interest.
- Donor Crowdfunding: Donor crowdfunding allows a business owner to receive donations with no strings attached. There is no obligation to provide donors with anything in return for their generosity.
- Reward-Based Crowdfunding: In reward-based crowdfunding, the business owner provides rewards—be it a thank you card or early access to a product—as incentives for backing.2
Top Crowdfunding Sites
Every crowdfunding site is different. As such, not every option will be right for any business venture. To ensure success, it is best to research each site and compare it to your business plan.
To help in this decision, here are a few of the top crowdfunding sites and what they have to offer.
No matter what the crowdfunding best of list you look at, Kickstarter tops them all. This rewards-based type has helped small businesses in music, games, publishing, arts, design, and technology, along with many other fields. In fact, the platform has helped 223,968 campaigns and counting raise funds to get their dreams off the ground. As a result, you have a 39.88 percent success rate when choosing Kickstarter to fund a project.3
Kickstarter charges a five percent fee, but only if your goal is reached. On top of the platform fee, there are processing fees. They start at three percent plus $0.20 per pledge fee. If pledges are under $10, that fee is discounted to five percent plus $0.05 per pledge fee.4
Next on our list is one many have heard of, but perhaps not within the crowdfunding circles. It is GoFundMe. Your small business may benefit from the familiarity supporters have with the platform.
GoFundMe, a donor type, is currently available in 19 countries, and one must meet certain withdrawal requirements to participate. These include having a:
- Driver’s license
- Social Security Number
- Address and phone number
- Bank account in the small business or owner’s name
Fees for GoFundMe are 2.9 percent plus $0.30 per transaction.5
Now we move into equity crowdfunding. While donor and reword-based types are pretty much click-and-go, equity types have a few more hoops a small business need to jump through. One of them is the application process. As part of this process, businesses are required to disclose:
- Their company information
- Business goals
- How much has already been raised
- Any notable investors
SeedInvest will conduct a background check of your small business to ensure its legal standing and continue the discussion with you as its business owner. Their application takes minutes to complete, and approval can take two to three days.
SeedInvest has helped over 250 startups by raising more than $497 million with their network of over 697,000 investors.6
As for fees, SeedInvest is on the higher end. The platform charges a 7.5 percent replacement fee, as well as a five percent equity fee. In addition to the fees for a successful campaign, SeedInvest requires potential users get their financials reviewed by an accountant before approving them for an account. While this process is costly, SeedInvest will reimburse users up to $3,000. Moreover, all of these fees are only collected if the goal is met.7
The Final Step: So Now What?
When you have your crowdfunding platform chosen, your goal met, and the funds available to you, what is your next step? First, you will want to thank everyone who was part of your campaign. Through a letter, social media shoutout, special discount, free product, or a way to commemorate their participation. The key is never to forget those who got you from where you were to where you are.
When your small business is in its infant stage and you are looking for like-minded individuals to get behind your project, crowdfunding can be the foot that gets you through the door to your dreams. So, make sure to thoroughly research all the different crowdfunding options and platforms available for your small business.