A few years ago, crowdfunding became popular in the digital world. The financing approach emerged as one of the famous fund sourcing for start-up and small business. Forget seeking out capital firms and banks for a business loan. In this article, discover how crowdfunding can help you take off your start-up business.
What is crowdfunding?
Crowdfunding for small business is a game changer for business owners in raising money to kick-off the enterprise. Before, investing in the market becomes exclusive to professional and experienced investors. However, crowdfunding offers wide doors for any person to make a small investment in a new enterprise.
Crowdfunding is a non-conventional, innovative, and less traditional idea in securing funds. Crowdfunding has snowballed because of this unique and inclusive idea. Generally, it works by allowing populace of people, which is called “the crowd” to invest small, affordable amounts into business individually. The small amounts are put into a pool to gather money that can be accessed by business owners.
The use of the pool of funds can be either:
- Selling equity in a business
- Borrowing money for a business
- Selling pre-order products
- Raise money for charity
What’s new and not on crowdfunding?
Today, the popularization of crowdfunding brings together modern and new concepts. The platforms are highly technical and savvy despite that the business ventures and products are simple. The platforms are designed to automate the process of raising funds and gather funders.
Through your smartphones, you can browse all campaigns and invest by the tip of your fingers or in just one click. Moreover, the platforms are full of details, such as payment processing, legal disclaimers, investor updates, and bookkeeping.
Crowdfunding has been in existent for centuries. People with money for capitalization come together to finance feasible ventures and support confident entrepreneurs. America builds its fortune in this concept.
Today, the model and innovations of crowdfunding enable the entrepreneur to reach capital partners and investors.
How does crowdfunding business work?
IT experts and web developers developed online platforms. The platforms provide space for businesses to create a fundraising campaign. There is a pitch for investors that includes an overview of what the market is all about, business plan, management details, and details of how the company will use the money.
Thus, depending on what type of crowdfunding platform, the campaign will put equity or rewards in exchange for their investment.
Moreover, investors will pledge money during the campaign. Some crowdfunding platforms operate an all-or-nothing approach. Consequently, if the goal of fundraising is not met, then no funds will come in for investment. As a result, investors will walk away.
However, for some platforms like equity crowdfunding, whatever is the amount of money at the end of the campaign, the business will run even if the target wasn’t hit.
Remember, crowdfunding is not just about the raising of funds. Its community of investors that can test the product and get the feedback.
However, be careful and a warning, crowdfunding is not for people that are too emotional. You need to be proactive in pushing the pitch and drive interest to hit your funding goals. If prospects hit the target, you need to work hard to keep the investors trust you by giving updates and engage them in the growth of the business.
Categories of crowdfunding
· Donation and reward
The category of crowdfunding that people associate with charities. People donate because they believe for the objectives and advocacy. An example of this is charity fundraising. People give money but get nothing in return. All they have is the satisfaction that they supported the organization.
There are different variations of this concept. One example is a business that offers pre-order of products months before it is available. However, be reminded that not all companies apply to this category of crowdfunding.
· Peer to peer lending
The business borrows money from individual lenders and pays back the interest. They are not directly lending money to the company. They still have a team that assesses risk for the
individuals that give the money through the platform. The category works similarly with traditional unsecured business credit in terms of eligibility.
· Equity crowdfunding
Like the peer-to-peer lending, the investor takes equity or share of the business instead of repayment for a loan. It means there is a higher risk — no defined timeframe for getting back the money. The people are putting the money to make the business grow.
Equity crowdfunding can be a good option for a business that wants to raise money to grow but not eligible for a loan.