If you need a funding source to support your small or startup business, consider how crowdfunding might be a suitable option. You’ll need to give thought to the various types and platforms, create a plan to market your business and its crowdfunding needs, and communicate with and keep your promises to your backers.
Key takeaways
- Crowdfunding is a way to secure financing for new businesses by means of various campaigns to fundraise money.
- Crowdfunding sources financing from the public, mostly through individuals who donate to your campaign or invest in your business.
- While there is a fair bit of competition, crowdfunding is an alternative resource to raise funds quickly.
The following steps outline the process of how to crowdfund your small business and manage your fundraising campaign successfully.
Step 1: Choose Your Crowdfunding Method & Platform
There are various methods in which to receive crowdfunding, and all have differing expectations. Be sure to choose one that reflects what your business can offer in return.
These methods include:
- Donations: This method involves someone donating money to your business with no expectation of return.
- Equity: Investors can contribute funds in exchange for an ownership stake in your business. This method is regulated by the United States Securities and Exchange Commission (SEC) to protect investors from the potential risk of business failure.
- Debt: Similar to getting a small business loan, this method requires you to repay your investors within a designated period, with applicable rates and terms. Legal documentation will be necessary to outline the terms and conditions.
- Rewards: This option is optimal for businesses with limited resources as you provide an incentive to invest rather than having to pay back funds or offer equity.
You can use more than one method when crowdsourcing funds. Keep in mind there can be certain restrictions or regulations depending on the type you choose to pursue. Should you need to pay back investors or offer equity, ensure your business has the budget and capacity to do so.
Step 2: Consider Funding Targets
You’ll need to define an attainable funding target that represents your budget. There are a few factors that you should take into consideration when contemplating your funding target:
- Platform processing fees and potential profit percentages owed
- Production or service costs of your business, such as distribution costs and vendor costs
- Marketing costs related to your campaign
- Cost of rewards promised to investors or donors
Be sure to account for all potential expenses when determining a dollar amount. There’s a balance between targeting too low and too high:
- If your projections are too low, you risk being short of the funds needed to be able to grow your business and reach your goals.
- If your target is too high, you risk losing funds altogether if you miss the funding target.
Step 3: Understand Rules & Regulations
Depending on the crowdfunding type, certain rules and regulations will need to be followed as a condition of your investor’s support. These conditions will vary depending on the platform and are regulated accordingly.
To help mitigate risk, be sure to read your platform’s conditions carefully before diving in. Should you require any legal advice on the compliance of any platform, consult an attorney or legal professional.
Step 4: Plan Your Campaign
Planning your campaign will require a fair amount of strategy on your part; you’ll need to ensure you follow the timing requirements of each platform that you choose and adjust your timeline for fundraising accordingly. You’ll also want to account for how the funds will be disbursed to you, which will also vary depending on the platform.
Since you’ve determined your fundraising target, you should define the goals that those funds will support. Be specific as to how these funds will help your business grow and provide details to potential investors as to how you plan to utilize them, such as raising funds to launch a new product, increase inventory, or help finance a location for your business.
- What’s the timeline of your campaign?
- What will the raised funds be utilized for?
- Who is your target investor?
Step 5: Market Your Campaign
Once you’ve ironed the details out, you’ll need to publicly pitch your campaign to find interested investors or donors. To help spread the word, consider using social media or local networking to bring awareness to your efforts. Using the internet to market your campaign will help you to reach a wider audience, and therefore attract investors of various methods.
It’s worth mentioning that your campaign should tell your story—you should provide resources that outline the background of your business, your goals, and your cause. You’ll gain more traction from investors if they can get a full scope of who and what they’re supporting, which can potentially lead to recurring donations.
Step 6: Communicate With and Reward Your Backers
Crowdfunding is a saturated market, so you’ll need to stand out and plan accordingly to have fundraising success. This means communicating with your investors in regard to the cause, progress, and goals of your business after you’ve gained their support. You’re more likely to get more of a following if investors or donors see that their funds are driving business success and what you can offer them in return.
If you reward your backers, it may incentivize them to further invest in your business, especially if you’ve got a good track record in communicating with them. Rewards can include:
- Free items, such as T-shirts, water bottles, and swag bags
- Invitations to events, such as networking opportunities and company gatherings
- Recognition via a public platform, such as social media and company site
While this is unnecessary in every fundraising endeavor, it can certainly help your efforts by recognizing your investors.
Step 7: Keep Your Promises
Crowdfunding will be an ongoing process in the sense that you’ll need to keep any promises you make to investors, whether it be a reward or equity opportunity. This is not only for the sake of the credibility of your business but also to pave the way for any future financing opportunities.
Even if you don’t meet your fundraising goal, it’s crucial to remain in contact with those who have contributed to your business. Doing so builds valuable relationships and promotes a strong reputation.
Alternatives to Business Crowdfunding
If you are looking for alternatives to crowdfunding, or if you decide crowdfunding may not be the best fit for your business, there are a wide variety of startup business loans to consider. Here are some options:
- Angel investors: These investors provide seed money to high-potential startups in exchange for equity stakes in the business. See our guide on how to raise angel funding for your business for help in this area.
- Friends and family loan: Sourcing funds from friends and family is a flexible and accessible option and usually provides more favorable rates and terms.
- Rollover for business startups (ROBS): A ROBS allows you to use funds from your personal retirement account with an investment of $50,000 or more.
- Small Business Administration (SBA) loan: SBA loans are available to small and startup businesses with strong credit history. These loans are partly backed by the government and offer lower interest rates and favorable terms.
- Small business line of credit: A business line of credit is considered a revolving credit facility since the line is paid down over time and can be used on a recurring basis. It allows for quick and flexible access to funds with limited restrictions.
Frequently Asked Questions (FAQs)
Depending on the platform and your goals, crowdfunding campaigns can last anywhere from a few weeks to several months.
Yes—if you choose a debt-based crowdfunding source, you’ll repay funds similar to getting a traditional loan. Otherwise, other types of crowdfunding involve returns in the form of equity or rewards.
The four types of crowdfunding are:
- Donation-based: Funds sourced from donors with no return obligations.
- Equity-based: Investors receive equity stakes in exchange for their investment.
- Debt-based: Similar to a loan, funds are paid back over a period of time.
- Rewards-based: In exchange for funds, investors or donors receive rewards from the business.
Bottom Line
Now that you know how to crowdfund a business, you can determine if it’s a suitable venture for your goals. While there’s quite a bit of competition, exploring this alternative funding source can help your business grow if your fundraising efforts are successful. Be sure to weigh the pros and cons of business crowdfunding before diving in.
