What Small Businesses Need To Know About Crowdfunding

Anyone who wants to turn their entrepreneurial dream into a small business will at some point have to tackle the funding issue. 

There are several options, from angel investors to business loans, but one solution that an increasing number of individuals are choosing is crowdfunding. On the face of it, crowdfunding solves a lot of the traditional issues surrounding funding a new business launch, but is it too good to be true?

What Is Crowdfunding?

Crowdfunding, as the name suggests, is the process of raising money for a project collectively, from the general public. You seek out people who are passionate about that specific project and want to be involved, and each of them contributes however much they want. 

Crowdfunding is a method of fundraising that has massively benefited from the rise of the internet, which has made it increasingly easy to market ideas and connect with like-minded people all over the planet.

What Are the Alternatives?

To understand if crowdfunding is right for you, first you need to understand what the alternatives are:

Bank Loan

One of the most common alternatives to crowdfunding for small businesses is securing a loan from a bank. Most high street banks offer business loans for a wide variety of circumstances, generally between £10,000 and £500,000. 

Unlike with many forms of crowdfunding, you won’t need to give up equity or rewards in return the money you receive – you’ll simply pay it back over time, as you would a normal loan. Interest rates vary, but tend to be between 2% and 13% from traditional banks. With online lenders, rates can fluctuate a lot more.

Equity Finance

If you’re not sure that you’ll be able to pay back a loan, perhaps due to uncertainties over when your business will start to turn a profit, there are other alternatives such as equity finance. With equity finance, you essentially sell a stake in your business to an investor, in return for cash.

While it does mean that you will no longer be in complete possession of your company, it does come with some benefits. One of these is that your investor has a direct interest in the growth of your business. In many cases, this means that they will help in any way that they can, potentially supplying valuable expertise.

How Is Crowdfunding Done?

Crowdfunding is generally carried out via online platforms which have specifically been designed for that purpose.

Types of Crowdfunding

There are a variety of different forms of crowdfunding, with the variable generally being what the investor will get back in return. The different forms generally come under the following categories:

• Donation: As the name suggests, crowdfunding based on donation consists of people donating to your cause (often if it’s charitable), without necessarily expecting something in return.

• Loan: Loan crowdfunding is essentially large-scale peer-to-peer lending, with a pre-agreed interest rate.

• Reward: Reward crowdfunding is a kind of crowdfunding that is becoming increasingly common, whereby the lender will receive a reward in return for investment, generally something linked to the project they’re funding.

• Investment: More similar to traditional venture capital investment, lenders in this case will receive a stake in the business in return for their funding.

What Are the Most Popular Platforms?

Crowdfunding websites are perhaps the most important thing that has facilitated the massive rise in popularity of crowdfunding. Some of the most popular options are listed below:

• Kickstarter: Kickstarter is a popular crowdfunding site that focuses on bringing creative projects to life. A fantastic example of a success story from their platform is Mercator, a London-based design studio that makes space-inspired items.
  
• Seedrs: Seedrs is a crowdfunding platform that focuses on bringing seed and angel investors together with new startup businesses.
  
• Crowdfunder: Crowdfunder is a multipurpose platform, allowing you to raise money for businesses, community projects, personal causes and charities among other things.
  
• Crowdcube: Crowdcube allows large groups of individuals to invest collectively in a more traditional way, generally in return for equity in the company they fund.

Which Is Right for Me?

Which crowdfunding method is right for you depends on your business and what kind of thing you want to give to your lenders in return for their financial backing. Giving equity might have less of an impact in the short run, but you could regret it later down the line. 

Likewise, promising a massive amount of rewards to a diverse pool of investors could make your first year very tricky operationally.