Crowdfunding series 1/4- The new alternative way to fund your business idea
You have a great idea, BUT for whatever reason your credit is not that great but you know
with the right support you could be successful. However, you think there is not much hope!
WRONG ,crowdfunding could be just what you are looking for.
In this funding series I will focus on crowdfunding.
I will share with you everything you need to know about crowdfunding:
- What’s involved
- How to get started
- What you need to do if you want to run a successful campaign
And achieve crowdfunding success
The world has changed, the internet has given everyone even you!
A new way to raise all important funds for your business.
What we are going to discuss in this funding series would not have even been possible just a few years ago.
What I am talking about is crowdfunding.
For those of my readers that have not heard the term before, crowdfunding gives entrepreneur just like you the opportunity to raise small amounts of money from lots of different people.
The process which we will get into in more detail in crowdfunding series 2, is completed using the internet.
People who are interested in your business idea will use the internet to make an investment.
For those of you that are familiar with traditional business financing you will know that it involves asking a few people for large sums of money.
Whereas what I love about Crowdfunding
Is that it switches this all around, by using the internet to talk to thousands – if not millions– of potential funders.
And if you do it right! It can be:
- Cheaper than raising funds through more traditional bank
- Scalable – which means you can target the audience size to meet your funding needs.
I think it’s fair to point out that similar concepts have been around for some time like mail order subscriptions, fundraising events
However, the term crowdfunding refers specifically to the internet as its method for deliver and execution.
So, what’s it all about! Well
The process is very simple and consists of three key elements
- It all starts with – the business or a business idea
- Then the individuals or groups who want to support the business
- Finally, what’s referred to as a platform, which is located on the internet and its where everything happens.
Now anyone can use crowdfunding for a variety of things but our focus for the article is business.
You may think crowdfunding is something new!
But what if I was to tell you, in fact, it’s been around for just over 20 years, yes you heard that right.
It all started out in the music industry.
It was used by Artists, they would use their fan base to fund the production of their new albums.
So, it will be no surprise when I tell you the first website platform was Artistshare
It launched in 2003, Artistshare was the first website which allowed artist to go directly to the public and ask for funds.
It was then only a few years later when we started to see more crowdfunding sites appear. Various entrepreneurs started to use them as a platform to fund the development of their business ideas.
Today there are three main types of crowdfunding:
- Donation and Rewards
Let’s start by digging deeper into the main three types of crowdfunding options available.
- Donations and rewards crowdfunding
You present your business or business idea to potential people who will give you money because they want to support you. They want nothing back in return. They are motivated by the pleasure of giving and watching you become successful.
It is slightly different, yet it is the most popular out of the two. Investors will give you money in return for a product or service
You can choose to offer different levels of rewards based on the amount of money invested.
For example, funding a game design for $10 may get the investor a free game once it’s made.
However, if they invest $50 it may get them a personal thank you from the creator on the website.
The best thing also about this type of crowdfunding is anyone can get involved.
Anyone can donate from as little as $5
One main advantage about this type of crowdfunding is that the business gets to give away a product or service without incurring any debt.
Or alternatively having to give up and shares in their company. So, if you do it right and you attract the right number of followers to support your campaign. This could be a win, win for the company and its investors…..
2. Debt- based crowdfunding
You will here the term ‘crowd lending’ this model involves requesting support and resources from many investors.
It’s the same as traditional lending, the investors will invest money into your business in return for capital and interest payments.
As with any funding option, interest rates will be band according to risk.
Depending on the level of investment sought, the company will be required to provide some security. This will be in the form of a business asset or a personal guarantee.
Its fair to say, I work with a few debts based crowdfunding partners.
In some cases, I have found:
- Rates to be higher than bank lending when the company has a high-risk banding.
- Due diligence process can be onerous
- And finally, most will not support sole traders or startups
However, if you are a company and need cash quick this is still an option to consider as I have submitted applications on a Monday and funds have been in the client’s bank account on the Friday.
You can check out debt based crowdfunding to see our partners if this is something that interests you.
3. Equity based crowdfunding
Equity crowdfunding is like no other, it has no debt element to it. Unlike debt-based crowd funding or traditional finance. You borrow funds and then make capital and interest repayments.
Also with equity crowdfunding you give up shares to your investors!
BUT – before you start jumping up and down with excitement….
Everything comes with a price at a price…
First of all, you will need to be able to:
- Provide a business plan
- Demonstrate exponential growth potential
- Provide the opportunity for innovative disruption if you are a tech-business
Furthermore, jump through a load of hoops which include:
- Due diligence
Finally, equity based crowdfunding is governed by rules and regulations.
Investor will be looking for:
- Small businesses that have high growth potential
- Can expand into new markets
- Have the potential to create more product offerings.
It’s fair to say that equity investment is classified as high risk for any investor.
So, where does that leave me! As a small business owner, I hear you shout!
In crowdfunding 2 of this blog series, I will discuss why so many small business owners just like you have opted to use rewards-based crowdfunding.
Do not miss the next article in this crowdfunding series