Can Crowdfunding Be the Right Solution for Starting a New Business?
If you have a great idea and a wish to kick-start your own small business, you need to have a solid financial state because some time can pass before you start earning. Unless you have saved up a hefty sum, you will probably need an external source of funding, preferably not one coming from your family members or friends since you want to keep your business and private life separate.
Many entrepreneurs will turn towards bank loans, as the most traditional source of funding but you may be surprised by the conditions not being so kind to new small businesses and the time it takes for a loan to be granted or declined. This is why you should consider crowdfunding, which consists of accumulating (usually) small donations from different investors via the internet. This means that there is much less bureaucracy involved and you would have very little contact with a bank, which makes the entire process less complicated. With that in mind, here is an overview of four different types of crowdfunding to choose from.
Try out donation-based crowdfunding
Donation-based crowdfunding is the most common of these four types and how it usually goes is that you post an idea online and people send money if they think it is worthy of sharing, listening or seeing. To illustrate this type of funding, let’s say that you are a children’s sports team which is in need of new uniforms – what you would do is post the reason behind this cause, for instance, that they are going to international competition so they need new uniforms and donors’ support. So, the donors would send money if they deem the cause to be important.
As the name suggests, donation-based crowdfunding doesn’t entail any gifts, rewards or any other form of reciprocation from your side. This is why it might be more suitable for a private or charitable cause or non-profit business because with such ideas behind it, there is little room for misunderstandings and people don’t expect anything in return except gratitude and seeing the money successfully raised.
Consider debt-based crowdfunding
If you need to raise money quickly, this type of crowdfunding may be just the solution you are looking for – you share your business idea but instead of people giving you money without expecting anything in return, they pool together to give you a loan. You then need to repay that loan over an agreed period of time at a present interest rate.
Since the crowd receives interest on the amount they have loaned out, it makes them more inclined to participate in fundraising. Generally, loan plans that don’t require collateral, that is, unsecured business loans plans, put much less pressure on your business’ cash flow than traditional bank loans. Not to mention that those loans are most often approved and settledon the same business day making it a quick and efficient method to raise money. The combination of a good idea and a promise of interest will help you influence the speed of accumulating the necessary money.
Choose reward-based crowdfunding
Regardless of whether your plans are to sell items online or to offer services, reward-based crowdfunding is definitely an option to try. How it functions is that your business idea attracts funds on the promise of some type of reward or some special offer. This is especially convenient for product-based businesses because they can offer the investors to be the first ones to try out your products or to get a significant discount on them, depending on the amount invested.
These kinds of incentives are also a sign of respect and appreciation and if the crowd finds your products interesting or useful, they might even be prompted to become loyal customers in the future. Reward-based crowdfunding is also an efficient strategy to start creating a customer base even before you kickstart your business and represents a relatively fast manner to accumulate funds without having to pay the investors their money back directly.
Opt for equity-based crowdfunding
With equity-based crowdfunding, you are not only offering your business idea, but you are also offering securities, that is, shares, convertible notes, debt, revenue share, etc. to the crowd. This means that they would have a chance to own a part of your company, making it quite an exciting notion, especially if it turns into a successful business they can boast about being a part of from the get-go.
This type of funding is still relatively young which might make some entrepreneurs reluctant to try their luck with it but one of the crucial benefits is that the individuals who own shares in the company will have personal reasons to see your company succeed. This means that you will create an army of brand ambassadors at the very start which will also result in a substantial customer base that would be ready for expansion if you market your business ideas right.
So, can crowdfunding be the right solution for your new business? The answer is – yes, definitely! Before you opt for any source of funding, naturally, you would need to think thoroughly about your goals and come up with an assessment regarding the amount of money you will need to start your small business. As mentioned, traditional bank loans can be a bit too strict which is only natural because they want to make sure that their investment will be returned; but with crowdfunding, on the other hand, you are the one who outlines the conditions.
Choosing the right crowdfunding method boils down to a combination of aspirations and possibilities, so for instance, if you plan to sell products, reward-based crowdfunding may be the answer to your questions since those products can become the reward. In case you are in a hurry to raise the necessary capital, you can get involved with debt-based crowdfunding or equity-based one if you are keen on leveraging on the interest your investors have in your business becoming successful. Finally, if we take crowdfunding in its original form, you can accumulate funds for your charity or non-profit organization by way of donations. No matter which form you choose or which crowdfunding platform, just believe in your idea so that others will see its value and decide to help you bring it to life.
I’m Willy Beamen, contributor for Bizzmarkblog with 15 years of experience from Sydney, Australia. My work is mostly focused on helping small business owners and local startups to get off the ground and expand.