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Fund Your Prospective Small Business: Crowdfunding Tips and Tricks
  • 09 February 2017
  • Eric Michaels

Fund Your Prospective Small Business: Crowdfunding Tips and Tricks

It can sometimes be difficult for small business owners to secure financing. If you cannot tap a personal network or obtain a bank loan, you may have to get a bit creative. This often means that you must look outside of traditional funding sources to get a project going. As scary as crowdfunding may sound, it could be the greatest thing you ever do for your company. Before you make your pitch, just make sure that you are aware of the potential risks involved.

Here are some ideas on how to fund your prospective small business:

The basics of crowdfunding

In the simplest terms, crowdfunding involves getting funding for a particular project from outside parties. These investors may be people you know or strangers. Crowdfunding typically takes place through websites such as Kickstarter or Indiegogo, where people go to add money to an account. Professionals such as artists, inventors, and business owners may turn to one of these platforms for help in reaching their monetary goals. There are four types of crowdfunding:

  • Donations
    In this scenario, someone who is raising money for a cause asks for money that becomes a donation. Over the years, people have used this system to fund medical treatments, provide safe passage, and support other important causes. The donation amounts are usually less than $1,000, but they may be as low as $1. GoFundMe is a popular site for donations of this kind.
  • Rewards
    An individual who opts for rewards-based crowdfunding offers something in return for any contributions that he or she receives. For example, you could potentially offer investors a copy of the product you are making. The dollar amounts associated with this type of crowdfunding are typically under $500. Kickstarter is a popular rewards-based option.
  • Equity
    If you decide to use the equity-based system, you have to give up a piece of your company in exchange for the contribution. Dollar amounts associated with these types of transactions tend to be much larger (over $1,000). Business owners who are interested in an equity-based system can refer to sites such as AngelList.
  • Debt
    When you cannot secure a loan the traditional way but do not want to give up equity in your company, debt crowdfunding may be your best option. In this model, small investors loan you money in accordance with various terms.
Tips for successful crowdfunding

Though there are no precise formulas that can apply to every business, there are certain crowdfunding guidelines worth following. Here are some ideas for business owners who are hoping to offer rewards in exchange for financing:

  • Multiple tiers
    You may have varying levels of interest in your project, so you do not want to price anyone out. As a best practice, you should offer four or five tiers of rewards, ranging from a public shout-out to a copy of the product you plan to make.
  • Deposits
    If you are close to having the amount you need to close a project, you may want to offer potential customers the chance to pre-order your products. Once you have the resources, you can fill these orders.

When it comes to equity and debt funding, the stakes are slightly higher. In order to ensure that you have the best crowdfunding experience, you should keep these variables in mind:

  • Information
    If you are working off of the equity model, you need to prepare a detailed description of your company, as well as a business plan. You also need to prepare your fundraising terms—including when the investment window closes—beforehand.
  • How terms are dictated
    Debt funding may involve options for your investors to gain equity in your company down the line. Make sure that you dictate these terms (especially the rate of interest and scheduled payments) in a careful manner.
  • Risk
    While the equity model involves fewer risks for business owners, it does require you to release control of some of your company. On the other hand, debt crowdfunding requires cash flow you can use to funnel back to your creditors.

When you are trying to figure out the best way to fund your prospective small business, you should consider crowdfunding as a viable option.

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