What You Need to Know about Crowdfunding for Small Business
By Rae Steinbach, Last updated: 2023-01-18 (originally published on 2019-11-01)
While crowdfunding may be among the newer options for funding a small business, it has grown in popularity and there are several great success stories. As you may already know, crowdfunding is the practice of obtaining funding through a large number of people rather than relying on one large investor to supply all of the funding.
Depending on the goals of your business, crowdfunding could be one of the best options for funding your small business. That said, it is not as simple as asking a bunch of people for money. It takes time, patience, and a good strategy if you want to have success with crowdfunding.
Types of Crowdfunding
Before you can get started on your campaign, you need to figure out which type of crowdfunding is right for your small business. The following are the four types of crowdfunding:
- Donation Crowdfunding: With this type of crowdfunding, people donate their money without expecting anything back in return. While this may sound like a great option, it typically only works for businesses that tie their success to a cause people believe in.
- Reward Crowdfunding: This is a type of crowdfunding that involves offering rewards in exchange for funding. In many cases, it is an early version of the product being developed, but some companies set up a crowdfunding rewards program to offer an array of gifts depending on the level of support provided.
- Debt Crowdfunding: Debt crowdfunding involves getting a bunch of small loans from a large number of people. With this option, you have to pay the money back, but getting a number of small loans from several people can sometimes be easier than getting one large loan from a single person or institution.
- Equity Crowdfunding: With this option, the investors get a stake in the company in exchange for funding. In essence, you are looking for people to invest in the business, and in return, they get to share in the profits if the venture succeeds.
Launching a Campaign
Once you know the type of crowdfunding that will work best for your business, you need to start planning your campaign. While every campaign is different, there are some elements that should be covered by most businesses that want to use crowdfunding.
Tell Your Story
People who participate in crowdfunding often get hooked by the story more than anything they can expect in return. You need to create a compelling narrative around your business and explain why you need funding. You then need to tell this story by making a crowdfunding video that will help to sell it to the public.
Build a Website
A website isn’t an absolute necessity, but it can go a long way toward helping your campaign succeed. A website shows people you are serious about your business, and it also provides a platform where you can explain the value of your business in greater depth.
Use Social Media
Social media can be a valuable tool for promoting your campaign. With a good social media strategy, you can raise awareness and steer people toward the platforms where they can provide the funding you need.
You can’t forget about your investors after they give you money. They are going to want to know about your progress. Make sure to post regular updates on your website and social media. You could even send out email updates to make sure you keep all of your investors in the loop.
Crowdfunding isn’t right for every business, but it can be beneficial. Before you jump into a campaign, evaluate all of your funding options to make sure you are choosing the one that is the best fit for the needs of your business. For starters, you can try a simple loan calculator. If crowdfunding is the right path for your business, take the time to develop a plan that will maximise your chance for success.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.