Key takeaways
- Crowdfunding allows you to raise capital by collecting small amounts of money from many individuals, usually via online platforms.
- The most common types of crowdfunding are rewards-based and equity-based crowdfunding.
- Popular online crowdfunding sites include Kickstarter, Indiegogo, Fundable and Wefunder.
Crowdfunding can be an alternative to a small-business loan — especially for startups. It not only gives business owners a relatively inexpensive way to raise capital, it also helps promote a business product or service and build a base of enthusiastic customers.
What is crowdfunding for businesses?
Crowdfunding allows entrepreneurs to use online platforms to raise money for their small businesses. Interested people can give cash to your cause, often in exchange for rewards or equity in your business after you’ve created your fundraising campaign.
How much do you need?
We'll start with a brief questionnaire to better understand the unique
needs of your business.
Once we uncover your personalized matches, our team will consult you
on the process moving forward.
How does crowdfunding work for businesses?
Here’s how crowdfunding works:
1. Choose a crowdfunding platform. You’ll want to confirm that the platform can be used for business purposes.
2. Create a business profile. Some crowdfunding companies may want to review your application before they allow you to use their platforms while others let you develop your campaign immediately.
3. Set up your campaign. You’ll typically need to include a funding goal and deadline.
4. Launch your campaign. Once your campaign is live you can begin raising funds.
5. Understand funding rules. Some platforms allow you to keep the funds you raise even if you don’t reach your goal, while others don’t.
6. Pay platform fees. Some platforms charge fees through a set percentage of funds you raise, a monthly fee or equity in your business.
Types of crowdfunding for small businesses
The two most common types of crowdfunding for small-business owners are rewards-based and equity-based.
Rewards-based crowdfunding
In rewards-based crowdfunding, donors receive a product, service or small gift related to the project, with the value depending on the amount donated. For instance, a $5 donation might be rewarded with a handwritten thank you card, while $50 or $100 might bring early access to your company’s product or service.
Rewards-based crowdfunding can be a good option for small-business owners looking to get their business off the ground without giving up equity in their business or taking on loan payments.
Equity-based crowdfunding
In equity-based crowdfunding, donors receive shares in the company; the number is based on the amount of the contribution. Contributors typically choose to invest in companies they believe will be successful in the future, as the success of the company directly influences the return on donors' investments.
This method of crowdfunding can be a good option for small businesses with solid growth plans. You’ll be giving up a portion of ownership in your business, but you won’t be taking on any additional debt.
Pros and cons of crowdfunding
Pros
Low-risk funding for your business idea.
Helps you market your product or service.
Potential to reach a broad group of investors.
Funding doesn’t need to be repaid.
Cons
Campaigns require significant time and effort.
May not raise large amounts of money.
May not receive funds if you don’t meet the funding goal.
Platforms often charge fees.
» MORE: How to get startup funding
Best crowdfunding platforms for small businesses
Here are some of the most popular crowdfunding sites for startups to raise capital:
Fundable
Fundable, a crowdfunding site specifically for small businesses, allows you to choose between rewards and equity-based funding.
When using Fundable as a rewards-based platform, it's all-or-nothing. You set a goal, determine a campaign timeframe and pick rewards. If you don’t meet or surpass your goal, you don’t collect any funds. Fundable doesn’t limit your campaign length but does say the average falls between 60 to 90 days. You pay a monthly fee starting at $179 to use Fundable.
Fundable also offers equity-based crowdfunding for the same monthly fee. Equity fundraising goals can range between $10,000 and $10 million when you use Fundable. There is no deadline for your campaign, but you must renew it every 90 days. Fundable recommends setting smaller goals that are achievable.
Kickstarter
A business can use Kickstarter to raise funds for a project. You need to decide on a funding goal amount, a campaign duration (between one and 60 days) and rewards for contributors.
It’s also an all-or-nothing funding model so you won’t receive any money if you don’t reach your goal. Kickstarter takes a 5% fee, and payment processing fees range between 3% to 5% per transaction.
Indiegogo
Indiegogo is similar to Fundable and Kickstarter: you decide on a target amount, create rewards for contributors and set a campaign deadline (up to 60 days).
However, you have the option to keep the funds you’ve raised with Indiegogo even if you don't meet your campaign goal and you can continue to raise funds after your deadline through Indiegogo InDemand. Indiegogo charges a 5% fee on the funds raised for your campaign plus 3% payment processing fees.
Wefunder
Wefunder typically expects businesses to generate traction from their own network before opening campaigns to its investor base, though specific requirements may vary. Campaign timelines are set on a case-by-case basis.
If you are successful in raising funds, Wefunder takes 7.9% as a fee and charges $1,000 per year as a management fee.
Republic
Businesses can raise funding through Republic — if they pass the company’s screening process. Republic says that fewer than 5% of applicants are accepted but that 90% or more of those businesses meet their minimum funding goals.
Campaigns can run for 60 days. The platform takes a commission of 7% of the money raised and 2% of the securities issued, plus payment processing fees up to 2.25%, typically.
How to create a successful crowdfunding campaign for your business
Use these tips to create a campaign that individuals will want to invest in:
Make sure your business stands out in a crowd. A successful crowdfunding campaign relies on your ability to capture the interest of potential donors or investors. This may mean that you have a unique product that fills a consumer void or a strong personal or business story that compels investors to give you a chance.
Offer valuable rewards. You’ll want to make sure you offer a reward that is compelling enough to capture interest. Rewards can be a product or service, but they can also include personal coaching, classes or exclusive invitations to attend company events.
Utilize your network: Having family, friends and a business network willing to support and promote your cause can amplify your fundraising efforts. Without a strong promotional base, it's harder to reach your financing goals.
Alternatives to crowdfunding for businesses
Crowdfunding may work to secure startup financing and generate interest in your product, but it may not be the best solution for long-term business financing. Here are some other ways to fund your business:
Business loans
For small businesses seeking financing, traditional lenders like banks and credit unions are a good starting point. Generally, a bank loan will offer the most competitive rates and terms, but a good credit score and multiple years in business are often required to qualify.
SBA loans
SBA loans, backed by the Small Business Administration, can be an alternative when you don’t qualify for a traditional bank loan. These loans offer low interest rates and long repayment terms, but also typically require good credit and multiple years in business. If you need funding of less than $50,000, an SBA microloan may be a good option. Microloans can have more flexible eligibility requirements than other types of SBA loans.
Online lenders
If you don’t qualify for a bank loan or an SBA loan, small-business loans offered by online lenders are another option. Online business loans often have less strict qualification requirements with some lenders working with startups and/or borrowers with bad credit.However, these loans often have higher interest rates and shorter loan terms.
Business credit cards
Because qualification is typically based on your personal credit instead of your business history, a business credit card can be a good option for startup funding. A business credit card gives you access to a revolving line of credit you can use for current and future business expenses. It can also build your business credit, making you more appealing to future lenders.
Personal loans
If your business history is too short to qualify for a bank loan, consider a personal loan to fund your business. Personal loan amounts may be smaller than those available with business loans, but rates can be lower for well-qualified borrowers, in some cases.
Business grants
Startup business grants are another funding option to consider. This free funding is offered through government agencies, private foundations and small-business incubator programs. Business grants can be designed for specific groups such as business grants for women or business grants for veterans. However, competition for grant funds is strong and you’ll need to set aside a significant amount of time for research and applications.
