Crowdfunding for Business: Everything You Need to Know

Apr 16, 2022

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Crowdfunding permits entrepreneurs to harness the potential to help raise funds for their small-scale businesses on the web. It’s not just a way of providing entrepreneurs with an inexpensive method of financing a new business concept. Still, it can also help promote a business’ product or service through social media and create an audience of loyal customers.

Setting up a crowdfunding campaign is easy: Use crowdfunding platforms to set up an online profile for your business or project. You set a fundraising goal and then post your request online. Sharing links to your page will generate interest and raise more funds. Interested people can make cash contributions towards your campaign, typically in exchange for company assets such as cash or equity.

crowd funding for business

What are the advantages of crowdfunding?

For small-sized business owners, the advantages of crowdfunding come in two ways. You get funding for your company and increase awareness about your product or service.

Imagine crowdfunding as networking with a twist. Instead of going to events with a small number of people to garner backing for your venture, it is possible to reach a more significant number of potential investors. It usually starts with your social circle by sharing your business idea with your friends and family via social media.

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This is also more like a grant than a loan because there is no obligation to pay back the money or fret about the interest rate.

Female entrepreneurs generally have greater success using crowdfunding platforms than their male counterparts. In “Women Unbound: Unlocking female potential as entrepreneurs,” a report from PwC and the Crowdfunding Center, women worldwide are 32 percent more likely to meet their goals for financing using crowdfunding than males.

It is suggested that crowdfunding can level the playing field for women since it provides financing to investors outside of the traditionally male-dominated venture capitalist companies. Women tend to use more personal language when they present their pitch, which can help create emotional connections, while men tend to take more formal approaches, which often employ the language of business.

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You’re not sure exactly what amount of funding you’ll get. If you fail to reach your funding goal, it may be nothing. However, as the report revealed, crowdfunding doesn’t guarantee cash. In fact, only 22% of campaigns run by women met their funding objectives.

What are the various kinds of funding?

Two of the most popular kinds of crowdfunding available to small business owners are reward-based and equity-based.

Rewards-based crowdfunding

When crowdfunding is based on rewards, participants get something or service associated with the project, and the amount of reward is based on the amount of money donated. For example, the donation of $5 could get rewarded by a personalized thank-you note, while $100 or $50 might provide the company’s service or product.

The concept of rewards-based crowdfunding is an excellent idea for small entrepreneurs who want to get their venture off on the right foot without being tied to shareholders or burdened by loans repayments.

Rewards-based crowdfunding platforms: Kickstarter, Indiegogo

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Equity-based crowdfunding

In crowdfunding based on equity, the contributors receive shares of the company. The amount of shares is determined by the amount of their contribution. The contributors decide to invest in companies that they believe will succeed in the future because the performance of the business directly affects the returns from the investments of contributors.

This type of crowdfunding is a great idea for small-scale businesses with solid growth plans. There will be investors who are part of your business that could cause some hiccups. This could include the increased scrutiny of regulators.

Platforms for crowdfunding based on equity: Republic, CircleUp, Crowdfunder, and Fundable, an online crowdfunding platform specifically designed for small-sized businesses that allow you to select between rewards- and equity-based financing.

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The key to success in crowdfunding

Your company stands out from the crowd. An effective crowdfunding strategy depends upon your capacity to draw the attention of potential investors. This means that you have unique products that fill an unmet need for consumers. Also, you have a compelling personal or professional story that entices investors to invest in your venture.

Investors appreciate your reward. Ensure you give either an equity-based reward or one that is attractive enough to draw attention.

There’s a large network of supporters, Family, and friends willing to help the cause and help promote it, which could boost your fundraising efforts. Without a strong base of support, it’s more difficult to achieve your goals in terms of financing.

Crowdfunding as opposed to other options for lending

Crowdfunding could help you get startup financing and create excitement about your business. However, it’s not an option for long-term financing for businesses. There are a variety of ways to fund your company; Here are some of the most popular choices:

Banks, credit unions

For financing small businesses, traditional lenders such as Credit unions or banks can be the ideal starting point. A loan from an institution like a credit union or bank requires a high credit score. It includes an interest charge, but developing an alliance with your bank may be advantageous for future needs for financing.

Online Lenders

If you aren’t eligible for an unsecured bank loan, you might want to consider small-business loans from online lenders. They might have less stringent requirements for qualification. However, costs for borrowing may be expensive, with certain lenders providing APRs, which can be as high as triple figures.

Business Credit Cards

Business credit cards grant an opportunity to draw a flexible line credit that can be used to cover future and current business expenses. It also helps improve your credit score for business, making you more attractive to potential lenders.

Personal Loans

If your business’s track record isn’t enough to be eligible for an investment loan from a bank or a business credit card, think about the possibility of a personal loan to finance your business. The loan amount may be less. However, rates may be lower for well-qualified borrowers.

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