Group of workers at table
Compared to traditional banks and lenders, crowdfunding offers a more flexible and creative option for businesses to raise capital. — Getty Images/Vadim_Key

There comes a point in nearly every small business’s lifecycle where reaching the next stage of growth means finding more funding. Whether you’re opening a second storefront, launching a new product, or hiring your first manager, moving toward the next stage of success may require investing more cash than you have on hand.

Small business owners have many different avenues for getting the funding they need to keep their businesses thriving. Small business loans, investments from venture capitalists or investments from friends and family are all effective and common options. However, there is another option available that doesn’t always get recognition it deserves: crowdfunding. According to analysis by Fundly, crowdfunding has raised more than $34 billion globally.

[Read: A Practical Guide to Funding Your Small Business with Business Loans and Beyond]

Here are the types of crowdfunding models available, where to set up your first crowdfunding campaign and how to run a successful crowdfunding campaign.

Types of crowdfunding

When you think of crowdfunding, the first thing that comes to mind is likely a website like Indiegogo or Kickstarter. These sites offer one particular model of crowdfunding, but there are four main types of crowdfunding that are popular right now:

  • Equity, where investors purchase equity shares and expect to receive a financial return and a portion of the profits as a return on their investment. This can be paid out either as a distribution or dividend.
  • Donation, where contributors do not expect to see any ROI for donating their money. Contributors believe in the mission and vision of your company, and support you for no ulterior financial motive.
  • Rewards, where investors receive a reward, usually a free product or service, but not a portion of the profit or equity in the company. Anyone can participate in the campaign, not just seasoned investors. This is a great option for a small business seeking to test a new product or reach a new market segment.
  • Debt or micro-lending, where contributors will receive their money back over a certain payment period, with interest, similar to a traditional small business loan. This is one of the largest forms of crowdfunding, bringing in an estimated $25 billion in peer-to-peer lending.

Donation-based crowdfunding is especially popular among nonprofit organizations and charities. Small businesses, on the other hand, tend to gravitate toward equity, micro-lending or rewards-based crowdfunding.

From a funding perspective, crowdfunding offers a much wider pool of investors than a traditional bank or venture capitalist firm.

Why should you consider crowdfunding?

There are some key benefits to using crowdfunding over traditional sources of financing. Its two biggest advantages over other models of fundraising are the publicity and exposure your business garners, as well as the access to a bigger pool of investors.

Crowdfunding sites are a great way to spread the news about your business and your unique value proposition. Each investor in a crowdfunding campaign is also a potential customer: By launching a campaign to your personal network, friends and family can promote your plans and spread the word to an extended network of participants (without the pressure to invest themselves). The best case scenario? Your crowdfunding campaign gains enough interest to go viral as your loyal advocates share your business idea near and far.

From a funding perspective, crowdfunding offers a much wider pool of investors than a traditional bank or venture capitalist firm. Plus, you can be a little more flexible in what you’re willing to trade for the investment you need. Venture capitalists will often ask for a share of ownership that some business owners are unwilling to cede. Crowdfunding campaigns can offer exclusive deals, beta products or fun content in lieu of equity.

[Read: 3 Things You Need to Know About Raising Venture Capital]

How to set up a crowdfunding campaign

There are a number of ways to launch a crowdfunding campaign. You can do it simply by setting up your own website and promoting your business idea. But, the most effective option is to join one of these crowdfunding sites:

  • Kickstarter is of the most popular fundraising sites out there, operating on the all-or-nothing model: Your business doesn’t get any funds unless you complete your campaign.
  • Indiegogo allows you to raise either fixed and flexible funding, meaning you can aim for a certain dollar amount (fixed) or go for any dollar amount (flexible).
  • RocketHub is a more niche site, specifically using crowdfunding for “entrepreneurs who are looking for venture capital for their art, business, science or social good project.”
  • Patreon is aimed at creators: Designers, videographers, podcasters, and YouTubers can raise money for a specific project and offer exclusive content to their funders in return.
  • CircleUp is a leader in equity fundraising, with a track record of having raised $260 million dollars for 196 startups. It’s a great option for business owners looking to scale up.
  • Lending Club is a micro-lending crowdfunding platform, offering up to $40,000 for personal loans or up to $300,000 for business loans. It’s a great alternative to getting a traditional bank loan.
  • GoFundMe is a donation crowdfunding site that does not charge any “success fees” like some of the other platforms. It’s also more competitive.

There are dozens of options out there: if none of these sites seem to fit your needs, check out FitSmallBusiness’s guide to the best crowdfunding sites.

Tips for crowdfunding successfully

There is a lot of money available through crowdfunding, yet only 50% of crowdfunding campaigns are successful.

Spend some time researching the best platform for your funding needs. Look into where your target customer might spend the most time: Kickstarter, Indiegogo, Patreon, or somewhere else? Then, tell a story with your campaign. The more personal you can make your request, the more an investor can feel connected to your business’s future. Offer great rewards and be willing to accept feedback from your funders. Crowdfunding is about bringing people together in support of your business, so be open and willing to share your passion with others.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Published August 08, 2019