Crowdfunding typically involves getting a small amount of money from a large number of investors and can be a good way to raise funds for your business. It can provide multiple benefits, such as eliminating the need to satisfy a lender’s loan requirements, getting access to larger amounts of money, and more.
However, some downsides do exist. For instance, crowdfunding platforms often have limited time windows to raise funds, and campaigns must differentiate themselves extremely well from similar products and services in the marketplace to be successful.
If you’re thinking of using crowdfunding for your business, the following list of pros and cons are what I believe to be among the most important to take into consideration:
| Pros | Cons |
|---|---|
| Can offer more flexible funding terms than traditional loans | May have high-pressure funding campaigns |
| Tends to be less taxing on your cash flow | Requires a well-marketed company or product |
| You may get access to professional guidance | Can be more expensive than traditional loans |
| Can select from multiple crowdfunding platforms | Tends to encourage more future competition |
| Restrictions on the use of funds are rarely an issue | |
Pros of crowdfunding explained
Crowdfunding can be a great opportunity to obtain funds for your business. Funds raised can be put toward developing products, growing your team, or promoting a new idea. It is an alternative to getting a small business loan for businesses that may not qualify and allows for networking opportunities with investors.
1. More flexible funding terms
With crowdfunding, you have multiple options you can allow investors to choose from in exchange for funding. Each provides a different form of return, and you can pick the most sustainable type for your business. This means you can choose to pay funds back over time, give rewards, or offer equity stakes if you lack the budget.
The investment options are as follows:
- Donation-based: This includes a donation to your business with no expectation of return.
- Debt-based: This requires you to repay your investors with applicable rates and terms, similar to a loan.
- Rewards-based: Businesses provide an incentive to invest rather than having debt or offering equity stakes.
- Equity-based: Investors can contribute funds in exchange for an ownership stake in your business.
2. Less taxing on company cash flow
Unlike many startup loans that lock you into a monthly payment, crowdfunding can give your company a cash flow boost if structured as either a donation, equity, or rewards-based campaign. That’s because those methods don’t require regular payments. Without a minimum monthly loan payment to worry about, this can give your business more financial room to breathe should revenues drop for several months.
3. Access to professional guidance
Not all investors will have business experience. However, if you attract the interest of seasoned investors who want an equity stake in your business, they may be able to offer you support and guidance regarding the next steps of growing your business. Chances are, they’ve been in a similar position and will help you to ensure a return on their investment.
4. Choice of multiple crowdfunding platforms
You can market your campaign across multiple platforms and maximize your fundraising efforts. This can also act as a fail-safe in case you miss your funding target on one or more platforms. It also helps to spread the word regarding your business, which is valuable to small or startup businesses with limited resources.
5. Few restrictions on the usage of funds
As long as you make good on your intentions and use the funds you’ve raised for business purposes, there are no restrictions as to how exactly you can utilize them. Of course, this may differ depending on the regulations enacted by the crowdfunding platform you use but, generally, the funds are quite flexible.
Cons of crowdfunding explained
As with any form of financing, there can be potential risks and disadvantages to crowdfunding. Before proceeding, consider the following drawbacks when deciding if crowdfunding is suitable for you and your business.
1. May have high-pressure funding campaigns
Opening a crowdfunding campaign can carry its fair share of stress. Crowdfunding platforms often limit the maximum time period for any campaign to around 90 days, with some or all of the proceeds raised being forfeited if the goal is not met. Additionally, investors may have high expectations on the expected return on investment, so you’ll need to make sure to stick to your promises and deliver on expectations, otherwise you run the risk of damaging the company’s reputation.
2. Requires a well-marketed company or product
Many successful crowdfunding campaigns often have a large social media following or otherwise large brand awareness in place already. It’s what many would consider a key component in successfully crowdfunding a business. This makes sense given the fact that crowdfunding involves raising a small amount of money from a large number of investors, so you’d want as large of a pool of investors as possible to improve the odds of hitting your funding goal.
3. May be more costly than loans
Some platforms may charge a percentage fee for the funds you raise. You’ll need to include this in your initial campaign budget, as it can get pricey if you don’t plan for this obstacle ahead of time. This is especially important to keep in mind if you miss your funding target and funds are returned, as you’ll then have to pay any applicable fees out-of-pocket.
4. Encourages more competition
Since crowdfunding is available to businesses of all sizes and industries, there’s an opportunity for competitors to offer similar developments that imitate your business. You should take legal precautions to protect your ideas and intellectual property.
Related resources:
Alternatives to crowdfunding
Crowdfunding is just one of several funding methods available to businesses. If it’s not the right fit for you, I recommend considering some traditional and other non-traditional means of funding as listed below:
- Traditional loans: Getting a loan from a lender is perhaps one of the most common ways a company can get money. Many loans, such as the best working capital loans, can issue funding in as little as 24 hours, and cater to businesses with all sorts of qualifications.
- Funding from friends and family: If you’re unable to get approved for a loan but you have friends or family who have the ability and willingness to invest in your company, you can get money in exchange for equity, opt for a gift, or structure it as a loan. Each has its own set of pros and cons, which we discuss in our guide on asking friends/family for funding.
- Rollover for business startups (ROBS): A ROBS is a way to access your retirement accounts tax- and penalty-free. It does require you to navigate multiple areas of tax regulations to avoid penalties or other compliance issues, however, so I strongly recommend using the services of one of our best ROBS providers.
Frequently asked questions (FAQs)
There are a variety of platforms available to businesses seeking crowdfunding investors. They can be found by networking or most commonly via an online platform.
Yes. As long as funds are used for the intended purpose of further growing your business, there aren’t restrictions as to how the funds can be used—unless defined by the platform utilized.
It depends on the type of investment contributed. If a debt-based investment was made, then yes. This is similar to a loan, in which funds are repaid over a period. Funds don’t have to be repaid if they are:
- Equity-based, where you instead offer equity stakes;
- Rewards-based, where you offer a reward to the investor; or
- Donation-based, which requires nothing in exchange to the investor.
Bottom line
Crowdfunding can be a great option for small businesses needing to raise capital. Considering crowdfunding pros and cons can help you decide if raising funds via this method is your best option. There are a variety of factors to consider before pursuing this route, and the advantages and drawbacks should be weighed accordingly to ensure the continued success of your business.
