Crowdfunding combines the concepts of crowdsourcing and microfinancing, bringing together various individuals who commit small amounts of money to projects and entities they want to support. This is often done through websites that make it easy for entities to find potential funders. Funders could expect something in return for their contributions—such as equity, products, or services—or they may donate the funds. There are four types of crowdfunding:
Lenders donate to a project or cause they believe in. There can be a reward for lending, but many times lending is primarily a donation with no return on investment. Kickstarter and Indiegogo are two examples.
Benefits of rewards-based crowdfunding
- It’s inexpensive: Most crowdfunding sites have two main costs associated with them. The first is a platform fee, which averages around 5% of whatever you earn. There will also be a credit card processing fee, which usually is around 3%.
- No credit check: Have you tried getting a loan and have been turned down due to your credit score? No worries. This isn’t a factor when setting up your crowdfunding campaign.
- No collateral required: The only collateral required to run your campaign is your time, that’s always a win!
- Won’t lose ownership: With rewards-based crowdfunding, you don’t have to give away equity in your company in exchange for donations.
- Increased brand awareness: The marketing that goes into your crowdfunding campaign can help familiarize people with your company and products — even if they don’t donate.
What to watch out for
- Not great for large amounts: Crowdfunding typically isn’t meant to raise over $100k. So if you are needing more than that, you should look into getting a business loan or giving up equity.
- Fixed funding: Depending on the platform, you may not get to keep any of the funds raised during the campaign unless you meet your goal. With this in mind, make sure you do your research on how the platform works!
- Exposure to competitors: Unless you have something so unique it couldn’t be easily replicated by a potential competitor, err on the side of caution before sharing your idea on one of these platforms.
- Not good for all projects: If you don’t have a product that’s exciting to the general public or only works with other businesses, you could have trouble raising funds.
- It’s an investment: Making a successful crowdfunding campaign can take a lot of time and effort that some businesses might not have the time for.
Commonly used for charitable causes, where donors give to a cause without expecting any return for their ‘investment'. Kiva
is an example of a donation-based site.
Equity crowdfunding provides a return to a lender, by giving the lender a portion of equity (ownership) in the company. Previously, only accredited investors could use a crowdfunding platform to invest in a business, but beginning in May, 2016, non-accredited investors (like you and me) will have the opportunity to invest in startups and other businesses. Of course there are rules and limitations, a summary of which can be found on The Securities and Exchange Commission Fact Sheet on crowdfunding.
P2P lending involves sharing your idea with other people through online platforms in hopes they will invest in your business. The loans are usually provided by many different investors, and borrowers can often gain funds quickly and at a lower interest rate than through traditional financing programs. Examples of P2P lenders are Lending Club and Prosper. P2P is NOT currently available for borrowers in Iowa.
Bottom line, there are hundreds of crowdfunding sites you could choose from. So if you are looking at launching a crowdfunding campaign to fund your business, it’s important to do your homework and find a site that matches your needs.