Funding your business can come about in different ways.
You can go the traditional route – save up money, raise the money through some investors, or work with a bank to secure a loan.
You can also be a bit creative with your business’s funding.
Crowdfunding is a way to raise money by having a group of people make contributions or investments in your business. In exchange, they can receive equity or rewards for investing.
Crowdfunding is becoming a popular method to finance a business. And it’s not just newer small businesses using it for funding. The Small Business Administration found 43% of crowdfunding businesses were as young as one-year-old. Eighty-eight percent were five years old or younger.
Crowdfunding can be used by a business that needs to expand to invest in new equipment but doesn’t have the cash flow for it. The business owner can set up a campaign and have people contribute to the expansion or equipment purchase. Crowdfunding can take the pressure off your need for funding so that you focus on other ways to grow your business, like using email marketing.
Find out how crowdfunding can be helpful for your business – regardless of what stage your company is in.
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What Is Crowdfunding?
Crowdfunding involves a group of people investing in your business. In exchange for investing in your business, backers receive a type of reward. This can be equity in the company or the chance to receive a product at a discounted rate.
Whether it’s creating a new product or investing in new equipment, the reasons businesses pursue crowdfunding varies. The method has grown in popularity and is commonly used by businesses in the tech industry. By using an online platform, businesses can start a crowdfunding campaign and set a deadline to raise a certain amount of money.
Here’s a basic explanation of how crowdfunding can work for a small business:
- A small business signs up on a crowdfunding platform. The owner sets up a goal amount they want to raise to purchase new equipment. A deadline to raise the money is chosen.
- The owner can set up rewards to give to people who invest in the company. In this scenario, the owner decides to reward equity in the business as a reward.
- If the goal is met by the end of the campaign, the business owner can use the money to invest in new equipment.
Depending on your business and campaign, your crowdfunding can be very successful.
3Doodler is a company that builds a pen allowing users to create 3D structures out of colored plastic. The company launched a crowdfunding campaign on Kickstarter in February 2013. The company was looking to raise $30,000. It ended up raising over $2.34 million from 26,457 backers.
Do You Have to Pay Back Crowdfunding?
You don’t generally have to pay back the money you receive from backers in a crowdfunding campaign. But you are responsible for ensuring your backers receive their rewards for investing. If you don’t follow through with this, they can file a lawsuit.
If the campaign fails and you don’t meet your crowdfunding goal, the backers receive a refund. This is usually handled by the platform used.
Is Crowdfunding Legal in the US?
Yes, crowdfunding is a legal way for businesses to raise money for your business in the US. In 2012, the Jumpstart Our Small Businesses Act was signed into law. The law made it easier for small businesses to raise money and eased some of the funding regulations. A large component of the law is Title III, which went into effect in 2015. This is also known as the “Crowdfund Act” and it allows a small business to use crowdfunding as a way to raise capital while also giving out equity. Prior to 2015, this was not allowed.
From 2015 to 2016 – the first year small businesses were able to use crowdfunding – 326 businesses conducted a campaign. Crowdfunding platforms raised investments of more than $30 million, according to the Small Business Administration.
There’s a lot to keep track of when you’re a business owner. You have to make sure your cash flow is in order so your business can keep running. You have to make sure your company is protected by having the right type of small business insurance. Crowdfunding is a more modern way to raise capital that gives you access to a larger network of potential investors.
One of the biggest benefits to crowdfunding is that a campaign creates a network of investors for your business. If you need another round of funding for your business in the future, you can reach out to this same network before pursuing other avenues.
In addition to having a group of investors, these people can also be used to bounce ideas off of. They’ve expressed an interest in your business. And they’ve shown that interest by investing. You can make them feel like they’re a part of the business by working with them and requesting feedback.
Crowdfunding also gives you access to capital in a different way than the traditional methods of funding your business. With a crowdfunding campaign, you don’t have to go to a bank or reach out to angel investors or venture capitalists. A crowdfunding campaign makes it easier for you to raise money for your business.
Crowdfunding can also come with less risk than other traditional ways of funding. This applies to both the business owner and investors. If your crowdfunding campaign fails to meet its goal, you won’t receive the money and backers won’t be charged. For example, if you only raise $30,000 out of the $50,000 goal, you won’t receive the $30,000. And the backers that invested in your company won’t be charged.
Successful crowdfunding campaigns can also serve as a marketing tool. When you launch a campaign, you’ll describe your business and its purpose. Most campaigns include a video, featuring the business founder and the products or services offered. The goal is to quickly and effectively tell your business’ story to convince people to invest in your company. When you pair your crowdfunding campaign with other digital channels – such as social media – it increases your business’s exposure. Simply put, a crowdfunding campaign can also double as a marketing tool for your business.
When it comes to crowdfunding, there are a number of platforms you can use. Here are a few platforms to check out. Whichever platform you choose to use, make sure you’ve read the details and understand how the payments work.
- Kickstarter – When you think of crowdfunding, Kickstarter likely comes to mind. It’s a platform used by many businesses, including big-name tech companies that were able to launch their products after successful campaigns. In order for your business to get funds, you have to meet your funding goal. This also means a backer’s card won’t be charged unless the goal is achieved. Kickstarter does charge a 5% fee if a campaign is successful. The fee is applied to the funds collected. There is also a payment processing fee between 3% and 5%.
- Indiegogo – This crowdfunding platform has helped tech products launch, as well as movies and home appliances. The biggest difference between Indiegogo and Kickstarter is you can choose whether to keep all of the donor money or not. Flexible funding means you can keep the money contributed to your business, even if you don’t meet the funding goal. Fixed funding is similar to Kickstarter – you’ll get the money if you meet your crowdfunding goal. Be aware, you can’t change your funding structure once the campaign launches. Indiegogo also charges a 5% platform fee for funds raised. If your campaign is using a Flexible funding plan, there are no fees applied if the goal isn’t reached. In this scenario, backers are refunded.
- Patreon – This platform caters to creators. Whether it’s creating videos, music or artwork, Patreon allows people to pay a monthly subscription to help support an artist or business. The platform also makes it easy to communicate with supporters. This helps develop a relationship with the people that are choosing to support you each month. Patreon is free to get started, but there are three plan tiers.
- The “Lite” plan gives you simple tools to let people support you each month or per creation. With the Lite plan, Patreon receives 5% of the monthly income you receive.
- The “Pro” plan gives you the ability to create membership tiers, access to analytics and insights, tools to create offers and promos and workshops. Patreon receives 8% of your monthly income.
- The “Premium” plan gives you a partner manager and team accounts. Patreon receives 12% of the monthly income.
How to Use Crowdfunding
Crowdfunding can be used to get your business up and running. It can also be used to help you launch a product or service. If you need funding to help get something to market, you can likely use crowdfunding for it.
If you decide to use crowdfunding as a way to fund your business, here are some simple ways to get started:
- Find a platform you want to use for your campaign. Pay attention to the details and if there are any fees you’ll have to pay for using the platform.
- Come up with a funding goal for your campaign. You should also choose a deadline to reach that goal. Be aware that if you don’t meet your fundraising goal by the deadline, you won’t receive the money people invested.
- Describe your company and product or service that you want to launch. Be succinct. And if possible, use photos to grab people’s attentions. Don’t forget to include a video for your campaign page.
- Determine what kind of rewards you want to give to people for investing in your business. This could be early access to the product or service at a discounted price. If you’re planning to give out stock or other securities, make sure you follow the federal regulations.
- Some platforms allow you to pose updates to your campaign page. If possible, provide brief updates on how your business is doing. This gives the people that already invested a chance to follow along with your journey. And for potential investors, it lets them know you’re serious about your business and are working hard to get it up and running.
Crowdfunding can help you start your business or bring a product or service to market. In exchange for a reward, people can invest in your company. Hundreds of businesses and products have launched successful crowdfunding campaigns. And your business can be next.
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