Jul. 17—Securing startup funding can be a barrier for entrepreneurs trying to get a new business off the ground. For many owners, the idea of asking a bank or single lender for thousands of dollars adds an entirely new layer of stress on top of the already overwhelming task of launching a business.
Proving to a lender that your idea is a worthy investment is not an easy sell. For this and other reasons, more and more entrepreneurs in recent years have shifted from traditional funding to crowdfunding to get the money they need to bring their product or service to market.
Crowdfunding has changed the rules of startup financing. It has shifted startup fundraising from a single lender model to a collective virtual effort, giving a startup financial support while instantly introducing the business to potential customers. The model has shown that the public is willing to contribute capital to worthy projects without any expectation of future profit.
There are three primary types of crowdfunding, each with different goals and risks.
Rewards-based crowdfunding involves asking your backers for capital in return for an incentive — perhaps the right to be among the first to receive shipment of your new product.
Equity crowdfunding involves pledging a portion of the value of your business to a funder in exchange for startup capital.
Peer-to-peer lending means that you will receive capital in the form of a loan which you're legally obligated to pay back.
Selecting the right crowdfunding platform is important, as each platform is set up to serve a different purpose and audience. Some of the most commonly used crowdfunding platforms include Kickstarter, the big name in crowdfunding for tech and creative entrepreneurs; GoFundMe, the best for personal fundraising; Indiegogo, great for tech startups and community projects; Causes, built for nonprofits; Patreon, great for musicians, creative endeavors and designers; CircleUp, ideal for equity funding for consumer brands and LendingClub, a great option for business loans
There are several important "must dos" when working in the crowdfunding arena. First, be sure your business is properly set up, including a bank account, a legal entity, proper licensing, insurance, etc. Never promise what you cannot deliver on. Always stay in good communication with your funders. And be sure to consult with an accountant on what portion of the funds you raise are viewed by the IRS as taxable business income.
Crowdfunding is a great way for entrepreneurs to get their businesses off the ground quickly. Like any means of fundraising, though, it comes with its own risks and hurdles. Do your research and consult other professionals who have been through the process, like a SCORE mentor.