Crowdfunding has become one of the easiest ways to raise capital in our rising digital world. It allows you to ask the entire Internet universe for help raising money for any sort of cause. A guy raised over $55,000 to make potato salad for goodness sake! Why shouldn’t you use it?
As with any funding option for your business, we encourage caution and research. Just like accounts receivable loans, a merchant cash advance or a business line of credit, crowdfunding has its pluses and minuses. You need to know what those are and how they’ll effect your business before you crack out the video-making equipment.
Crowdfunding’s appeal is that it allows people (all ages, races, genders, etc.) from around the world to contribute to a cause, project, or product. Anyone! We all have the opportunity to be philanthropists and business investors.
Just like small business loans, there are different types of crowdfunding campaigns.
Rewards-based crowdfunding. These are what most of us are used to seeing when it comes to crowdfunding. These campaigns usually support start-ups or projects that don’t qualify for traditional business loans. They typically range between $1,000 and $100,000 and offer incentives to encourage donors to give big. Unlike a traditional loan, the money is not repaid.
Equity crowdfunding. This is used most for start-ups and special projects, however, it’s going for a bigger dollar amount, usually $50,000 to $1 million. Instead of offering rewards to investors, these campaigns offer shares in the company. As with the rewards-based crowdfunding, the money isn’t repaid.
Peer to peer crowdfunding. This type of campaign connects borrowers with people who have money to lend. These transactions are usually facilitated through an exchange company like Lending Club. This version of crowdfunding is like a traditional loan in that the money is repaid with interest. The difference is the loan amount generates from individual investors instead of a financial institution.
When you hear about a guy getting $50,000 to make potato salad, it’s easy to see why crowdfunding is appealing. Ask and you shall receive, right? In theory, that is how it works. It also has these benefits:
- Reward-based and equity campaigns don’t require you to repay the money.
- Reward-based and equity campaigns don’t require a credit check or personal collateral.
- Peer-to-peer campaigns usually have lower interest rates than traditional lenders, i.e., banks.
- There’s no limit on the amount you can ask for.
- It’s a global platform. Help can literally come from anywhere.
- Creativity, sincerity, and innovation are encouraged and rewarded.
Crowdfunding isn’t as easy as it looks. It has its drawbacks. Here’s what the fun, support-me videos don’t tell you.
- All crowdfunding campaigns are subjected to fees by the hosting company (Kickstarter, Indiegogo, GoFundMe), usually ranging from 7% to 12%.
- Many host companies have an all-or-nothing policy. If you reach your goal amount in the allotted timeframe, you get all the money, if you don’t, you get nothing.
- Crowdfunding is fiercely competitive. There’s a plethora of campaigns vying for investors’ dollars.
- Successful campaigns require a lot of marketing. Keyword is A LOT. Facebook, Twitter, Instagram, all the way down to handing out fliers. You have to get the word out or your campaign will go nowhere.
- Rewards-based and equity crowdfunding are geared toward start-ups and special projects. Rarely do established businesses successfully raise investment capital through these venues.
These campaigns require a lot of work. From telling a compelling story to developing a kick-ass video to offering attractive incentives, you will be working for this money.
CROWDFUNDING VS TRADITIONAL BUSINESS LOANS
Crowdfunding is becoming as common place as traditional lending. Both can be wildly successful or complete failures. Neither have guaranteed outcomes. It really comes down to your gut and which option is going to let you sleep at night.
Here’s a quick rundown on how the two options compare to each other.
Crowdfunding (Reward-based and Equity only)
-No application or verification process
-No need for credit check or personal collateral
-All-or-nothing policy; you get all the cash or none of the cash
-No need to repay the money
-No interest rate
-Fees assessed by host company
-Requires full-time marketing effort
-Start-up and special project-oriented
-Allows for creativity and innovation
Traditional Business Loans
-Application and verification process
-Credit check and collateral required
-All-or-nothing policy; if you’re approved you get the money, if declined you don’t
-Money must be repaid
-Interest rate applies
-Fees assessed by lender
Peer-to-peer crowdfunding is a hybrid of these. It follows traditional loan protocols but substitutes private individuals for commercial lending institutions. All these funding venues require time. Plan on a 90-day window between starting the process and receiving the funds.
Watching Kickstarter videos or looking at projects on Indiegogo it’s hard to believe people are funding their businesses this way, but they are. In fact, crowdfunding is predicted to continue growing as a funding and investment tool. Before you jump on the crowdfunding bandwagon, look carefully at what you’re trying to do, who it appeals to, and what exactly you’re willing to risk, do, or give up to make it happen.
Being a business owner at this point in history has so many advantages, financing options being one of them. You aren’t limited to traditional business loans through traditional business lenders. It’s exciting to have so many choices. Explore, investigate, and take advantage of them – but do it wisely. A little knowledge and investigative questioning can go a long way.
Interested in nontraditional business lending options? Want to know more about crowdfunding versus small business loans? Need help discerning which funding option is right for you and your business? Our experts can help! You can reach them by phone at 855-933-8638 or you can use our Live Chat feature on our website at www.unitedcapitalsource.com. We look forward to helping you.