Crowdfunding is an alternative to traditional small-business financing that provides the means to transform a promising idea into profitable reality — without having to pay back a penny. Rewards-based crowdfunding is the most popular type of crowdfunding.
What is rewards-based crowdfunding?
Rewards-based, or seed, crowdfunding is a type of small-business financing in which entrepreneurs solicit financial donations from individuals in return for a product or service. There are about 19 times as many rewards campaigns as there are for its closely related counterpart, equity-based crowdfunding.
How does it work?
Business owners describe their project or business idea and fundraising goal on a crowdfunding platform. In return for donations, businesses provide rewards. For example, a jewelry designer might reward everyone who contributes $100 with an original handmade bracelet, or an inventor of solar-powered lawn mowers might give a mower to contributors at the $1,000 level.
Rewards don’t have to be substantial; some businesses offer a simple handwritten thank-you note.
Who is it good for?
This type of financing is geared toward startups, particularly in creative fields, that don’t qualify for traditional small-business loans but have compelling projects or want to test a market. Small businesses with a complex product or service might want to explore traditional funding options; it might be hard to explain the value of your company in layman’s terms to a crowdfunding audience.
Who can contribute?
Anyone — family, friends, customers, business partners — can contribute to a rewards crowdfunding campaign. Individual donations are often small, so business owners need to persuade as many people as possible to pitch in. Often, the campaign is shared on social media with the hope that the business owner’s followers will, in turn, share the campaign with their networks.
Is it free?
Platforms typically charge a percentage that can be as low as 5% to as high as 13% of funds raised, and may charge an additional processing fee.
Rewards-based crowdfunding pros and cons
Rewards crowdfunding allows small businesses to get new ideas off the ground without the burden of repaying a loan. Before jumping in, consider the pros and cons:
It’s one of the cheapest ways to raise capital
No collateral, credit check or previous business experience is needed
The process is simple and doesn’t require professional financial or legal help
You retain all equity and control in your company
Exposure gained on the platform can help establish a customer base and brand awareness
Since you’re relying on individual donations, rewards crowdfunding isn’t the best option for businesses seeking large amounts of funding
If you don’t reach your goal, you may have to forfeit any amount raised
Pitching your idea online exposes it to potential donors — and to competitors. To avoid having your idea stolen, protect yourself with patents.
How to get started
To start a reward crowdfunding campaign, apply on a crowdfunding platform. The most popular platforms are:
You’ll need a convincing pitch that appeals to as many people as possible, as well as attractive rewards at all donation levels. An entertaining, informative video can help sell your idea. For the broadest exposure, reach out to family, friends and associates via email and social media.
Not what you’re looking for?
There are many ways to fund your small business. Take this quiz to determine which is right for you.
SBA loans are backed by the U.S. Small Business Administration and issued by participating lenders, mostly banks. They are coveted by small business owners because they come with low rates and flexible terms.
An online term loan is lump-sum financing repaid over a fixed period of time (3-36 months for short-term and up to 10 years for long-term).
A business line of credit provides access to flexible cash, much like a credit card. You don't pay unless you use it.
Invoice factoring lets you turn unpaid customer invoices into immediate cash by either selling your invoices outright to an invoice factoring lender that collects on them from your customers directly, or using them as collateral with an invoice financing lender that requires you to collect on your invoices to pay off your loan.
Typically unsecured, you can get a personal loan in amounts ranging from $1,000 to more than $50,000. We recommend taking a maximum of $35,000 to fund your business.
Many small-business owners use credit cards for funding. Business credit cards are best for short-term expenses. Research has shown that small businesses that rely heavily on credit card financing typically fail.
Microlenders offer small-size loans for young businesses with limited revenue and history. They typically offer loans of $50,000 or less. Some microlenders specifically work with small businesses in underrepresented communities and provide business assistance.
We recommend the following ways to finance your business:
Why we recommend
Find a lender
A personal loan can be a source of startup funding because approval is typically based on your personal credit score.
NerdWallet recommends taking a maximum of $35,000 to fund your business.
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