Is Crowdfunding Right for Your Business?

by Steve Strauss

Traditionally, there have been two ways to fund a business: Debt financing and equity financing. Debt financing is what it sounds like – you take on debt in exchange for capital. Debt financing can take many forms. It could a loan from a bank, a Small Business Administration loan, or even a loan from a friend or family member. It actually makes little difference. If you go into debt for the money, that is debt financing.

Equity financing is different. With equity financing, you do not go into debt. Instead, here, you are essentially selling part of your business to an investor in return for the money you seek. Again, an equity investor can take any number of differently forms; it could be a regular partner, a silent partner, an angel investor, or, on a bigger scale, a venture capital (VC) firm.

Today, a third option has arisen, and it is good news for the small businessperson: Crowdfunding. Crowdfunding is great for all sorts of different reasons, but a main one is that you neither have to go into debt nor sell shares of your business in order to raise the money you seek. Instead, what happens is that you offer some sort of “reward” in exchange for the money.

Today, a third option has arisen, and it is good news for the small businessperson: Crowdfunding.

The more people pledge to your new project, the bigger the reward they receive.

For example, say that you want to open a sandwich shop. What you could do is go onto a crowdfunding website like Kickstarter or Indiegogo (there are scores of similar sites these days) and post a video about your new venture and explain how much money you are seeking to raise. You would then list various rewards people would get in return for pledging money to your cause. For instance, in exchange for, say, a $100 donation, you could agree to name a sandwich after them for a month. In return for a $500 donation, you could offer to name a meal deal after them.

If people believe in your business and want to be part of it, they will then pledge money to your campaign through the crowdfunding host website. On Kickstarter, you must raise 100 percent of the money you seek before the funds are released to you. This protects investors from losing their donation on projects that do not get fully funded. Imagine pledging $100 to a project that is seeking to raise $10,000, but only raises $3,200. You would want your money back, no? So this requirement makes a lot of sense and gives investors confidence.

The great thing about a crowdfunding campaign is that, if successful, entrepreneurs get to retain 100 pernt of the business, they do not go into debt, and they also create a group of people invested in their success – a crowd as it were.

So if you are looking to raise money for your business, consider taking this new option out for a spin. It just might pay off, for you and your crowd.