Seeking out the madding crowd
This is the last blog in our series about the options available for small business financing. For reference, here are the earlier entries:
We've covered traditional debt and equity financing in detail, and in this last blog we're going to discuss the latest buzzword in small business finance, "crowdfunding." While traditional financing essentially comes in two flavors (debt and equity), crowdfunding has three options, distinguished by what the company gives in exchange for cash.
Here's a little more info about each type:
Crowdfunding for Rewards
The most common and popular option, especially for new product launches, is reward-based crowdfunding. Sites like IndieGoGo and Kickstarter have helped small businesses raise hundreds of millions of dollars by allowing small raises for increasingly valuable rewards. Basically, the business owner sets up a fundraising page on one of these platforms, with the amount of the raise, some information about what the money will be used for, and whatever marketing pitch the owner thinks will bring in traffic. In return for cash, the business owner offers funders different tiers of rewards, based on the amount paid.
The key benefit of a reward-based crowdfunding effort is that you don't need to give any of your business away and you get to test the appetite for your product or service in the market. If you're wondering whether people want what you're selling, running a crowdfunding campaign is a pretty good way to do it. Also, with most platforms, you only pay when a campaign is successful, so there's no cost to taking a chance.
If you want more info on reward-based crowdfunding, Forbes put together a cool Top 10 list of the most successful crowdfunding campaigns ever. It's a good primer on what to do to be successful.
Crowdfunding for Equity
With the passage of the JOBS Act in 2012, the door was opened to equity crowdfunding for the first time in recent American history. Essentially, prior to the JOBS Act, small business owners looking to raise capital with equity could only pitch behind closed doors, and were usually required to deal only with personal acquaintances and accredited Angel Investors. That all changed in 2012, when the JOBS Act made it possible to make an equity offer to complete strangers in a public forum.
While the details are significantly more complex than that, the last few years have seen the rise of equity crowdfunding platforms that seek to manage the logistical and legal headaches associated with having potentially hundreds (or even thousands) of small investors. The mechanics of equity crowdfunding function similarly to reward-based funding, but in this case the business owner is giving away a portion of ownership of the company in exchange for money.
This can be a better way to crowdfund for businesses that may need to raise money for a specific project or business that doesn't lend itself well to reward-based funding. The downside is that, if successful, you will have reporting requirements to your new investors, which can be hard to manage for a small business.
Crowdfunding for Debt
That last type of crowdfunding (debt crowdfunding) has really taken off in the last few years with the rise of platforms like Lending Club, which pool money from investors into a fund that lends money to small businesses. The terms can be more fluid than traditional banks, and oftentimes the process of applying for the loan is much more streamlined, since most peer-to-peer lending platforms are online.
Like rewards-based crowdfunding, debt crowdfunding keeps control of the company firmly in the hands of the business owners, but they will have to pay back interest so there is a cost to borrowing the money. Also, since it's technically a debt, it may need to be paid back in some form, even in the instance of bankruptcy.
If you'd like to learn more about alternative financing options for your business, reach out to us for a free business evaluation.