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 is a list of crowdfunding advantages and disadvantages that I believe are 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 |
| May provide access to professional guidance | Can be more expensive than traditional loans |
| Can select from multiple crowdfunding platforms | Tends to encourage more future competition |
| Has fewer restrictions on the use of funds | May involve complex legal or compliance requirements |
Pros of crowdfunding explained
The main advantages of crowdfunding are that it can be a great opportunity to obtain funds and promote your business. Funds raised can be used to develop products, grow your team, or promote 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 of 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 for 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 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.
5. May involve complex legal or compliance requirements
Depending on the type of return you offer, you might be on the hook for various legal or compliance requirements. Equity and debt-based returns can require legal and regulatory considerations, such as filing disclosures with the SEC, drafting contracts, and maintaining investor communications. These obligations often require legal or accounting help, which can increase costs and effort. Even rewards-based campaigns can carry risk if you fail to deliver on your promises, potentially leading to legal issues.
Related resources:
Pros and cons per type of return
If you’re trying to determine what kind of return to offer investors that is best suitable for your campaign, consider these pros and cons regarding each type.
| PROS | CONS |
|---|---|
| Has no expectation of repayment; you can keep all funds donated without strings | Has no return appeal that could limit the interest of certain investors |
| Is considered to be low risk, as investors don’t expect returns such as equity | May be more difficult to raise a large sum if donation amounts are small |
| Can attract a wide variety of investors since it allows them to make contributions of any amount | May attract one-time contributions rather than consistent support |
| PROS | CONS |
|---|---|
| Allows you to retain full ownership of your business | Requires repayment even if your project fails |
| Provides access to capital without the need to seek debt-based financing from a bank | Can limit cash flow through monthly payments and interest accrual |
| Can offer structure in terms of interest rates and repayment schedule | Can impact your business or personal credit in the event of default |
| PROS | CONS |
|---|---|
| Offers a clear and tangible return for participating investors, which often attracts more investors | Can be costly to fulfill rewards, depending on what was promised |
| Has no risk of providing equity or entering into debt | Can create public pressure to deliver rewards quickly |
| Can be flexible in what’s offered as a reward, whether it be products, services, or SWAG | Often requires significant effort and planning to attract investors and manage rewards |
| PROS | CONS |
|---|---|
| Requires giving up ownership percentages of your business | Requires giving up ownership percentages of your business |
| Can include guidance from seasoned investors to help scale operations | Can be considered high pressure since investors want to see a strong return on their investment |
| Offers potential mentorship or networking opportunities | Involves ongoing relationships, as investors may influence operations |
Campaign tips and considerations
Running a successful campaign will require you to play your cards just right. That said, here are a few tips and considerations that will help you when planning your campaign:
- Make your business matter: Investors will want to know that what they invest in matters and will have an impact. Be sure to develop and share your story about your products or services, and send the right message that will attract investors looking to be a part of something that they’re interested in.
- Create compelling marketing materials: People will only consider investing if they know you exist. Creating strong marketing materials can help spread the word about your campaign and business operations so that you can reach as wide an audience as possible.
- Choose the right platform: Not all campaign platforms operate the same way. You’ll want to consider items such as fees, campaign and payout timeline, all-or-nothing funding stipulations, and network outreach.
- Study campaigns with a history of success: Before launching your campaign, you should dig into what tactics successful campaigns might have used, and use it to your advantage when planning to increase your chances of reaching your goals.
- Keep your audience in the loop: Engagement is everything when it comes to crowdfunding. This includes before, during, and after you run your campaign. You’re more likely to gain traction with supporters, both present and future, which can help if you need to scale your business further. It’s also important to communicate with your investors, as it’s a powerful way for them to see where their funds are going and the impact they’re making.
- Consider the competition: It can be tough to stand out, as crowdfunding can be an oversaturated endeavor. You should closely consider your competition, and find ways in which you can differentiate yourself and your campaign from the rest of the crowd.
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 raising money from friends and family to fund your business.
- 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 an experienced provider such as Guidant Financial.
- Business grants: Grants can be a great way to source funding without having to enter into any debt obligations. There are various types of business grants available, and they are often free or require minimal fees and materials to apply. You should come prepared with a business plan to supplement your application, so be sure to have that ready to go. See our roundup of the best small business grants for some options.
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:
1. Equity-based, where you instead offer equity stakes;
2. Rewards-based, where you offer a reward to the investor; or
3. 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.
