Small business financing: What is crowdfunding?

You’ve probably heard the term ‘crowdfunding.’ Or you may have heard of some of the sites associated with it, like GoFundMe and Kickstarter. But what is crowdfunding, how does it work and how can you use it in your business? It’s one creative strategy that you can use for small business financing, so let’s take a deeper dive. First things first though: Before you start raising millions of dollars in a successful crowdfunding campaign. You need to protect your business with commercial general liability insurance.

Crowdfunding defined

According to dictionary.com, crowdfunding is ‘the activity or process of raising money from a large number of people, typically through a website, as for a project or business.’ The theory is that if you can collect a small amount of money from each person in a large group, you can reach your larger goal.

Crowdfunding donors can be people you know or strangers. Sometimes, a good cause or an intriguing venture can go viral, raising funds from people all over the world.

How Crowdfunding Works

Anyone can start a crowdfunding campaign for just about any reason. If you need money for a legitimate purpose, you can post information on the crowdfunding site, stating how much you need and why. You also set an expiration date for the campaign.

Those who wish to donate can do so through the site. The money is collected by the site and disbursed to the fundraiser at the end of the campaign. Some sites require that you raise the total amount you’re asking for by the end of the campaign, which is known as the ‘all or nothing’ model. If you don’t reach your goal, the money collected goes back to the donors. Other sites let you keep whatever you raise, regardless of whether you reach your goal or not. Once your campaign has ended, the money raised will be deposited to your account. The crowdfunding site takes a small percentage of the money raised to cover their costs.

What crowdfunding funds

Different sites focus on different types of campaigns. For example, GoFundMe is geared toward charitable causes, such as people who need money for medical treatment or victims of natural disasters.

Kickstarter is geared toward creative endeavors, and specifies that ‘projects must create something to share with others.’ Kickstarter prohibits fundraising for charity or offering equity in exchange for cash. Kickstarter uses the all-or-nothing model, so if you don’t reach your funding goal within the timeframe you’ve selected, the donations are returned to the backers.

Crowdfunding sites will warn fundraisers not to try to raise money for illegal activities or to promote inappropriate content, but there’s very little actual policing of these rules. Donors are encouraged to do their own due diligence to satisfy for themselves that the cause they are supporting is legitimate.

Make sure the crowdfunding site you choose allows—and even encourages—businesses to raise funds on their site. Clearly define how much money you need and for what purpose. If you’re selling a product and are using crowdfunding to take advance order so you’ll have the money to manufacture, be clear about this. Let people know when they can expect to receive the product.

Crowdfunding sites

Choosing the best site for your crowdfunding campaign is critical to its success. Make sure the site you choose offers the kind of funding that will be best for your project. Here are some resources you should consider:

• GoFundMe focuses on raising money to help people in difficult circumstances, like those who need expensive medical treatment or who have been victims of a natural disaster.

• Kickstarter- is geared toward creative and business funding. In fact, charitable fundraising is prohibited on this site. Kickstarter is a good choice if you need money to manufacture a product, because they encourage product pre-sales and they use the all-or-nothing model.

• Indiegogo – lets you choose either all-or-nothing or flexible funding. You must offer ‘perks’ which can be the product you’re producing, or something else, and can vary by funding level. For example, a musician raising money for a new album may offer a CD at a certain funding level, a CD and t-shirt at a higher level, and a mention in the liner notes for the highest level.

• RocketHub – lets you keep all your funds regardless of whether you reach your goal. The focus is on projects in the areas of the arts, science, business and social good.

How to Achieve Crowdfunding Success

Here are some tips to make your crowdfunding project successful.

1. Create a compelling description of your project, including pictures if possible. Try to answer any question a donor might ask in your description.

2. Publicize your project through social and traditional media. Post a link to your crowdfunding page on all of your social media channels, and encourage your friends and family to do the same. Contact local TV stations and newspapers by email to let them know about your project. They may be interested in covering your story, especially if it is unique or touching in some way.

3. Don’t be shy. Make everyone you know aware of your project. If you’re like most crowdfunders, the majority of the money you raise will come from people you know.

If you need money to start or grow your business, crowdfunding can be a viable option for you. Choose the right site, craft a compelling project description, and spread the word!