If you’re not having luck with getting a small business loan from a bank and investors aren’t banging down your door to provide you with a smaller amount of cash to grow your business, crowdfunding might be the answer. Crowdfunding provides a way for startups to get financing (usually smaller amounts, like $10,000 or so) from multiple investors who pool their resources to reach the loan amount. We’ve heard about the great success Kiva has had in crowdfunding for impoverished areas around the world; now other organizations are working to provide the same concept to businesses.
How It Works
Business owners set up a profile on a crowdfunding site, with information about how much money they’re seeking, and what they plan to do with the funds. Whether or not the company is required to pay back the loan depends on the site. Prosper.com offers loans that are paid back with interest, but Peerbackers, IndieGoGo and Kickstarter treat those that fund projects as investors, and borrowers offer different perks, such as product samples or invitations to special events.
Is Crowdfunding Right for Your Business?
A very specific type of person loans money on these sites. He or she tends to be tech-savvy, uses social media, and is comfortable with lending or investing money in a total stranger’s business. If your target demographic doesn’t fit in that description, you might have a hard time getting people interested in your project to fund it. It helps to be tech-savvy and social yourself, as you’ll have a better success rate at meeting your funding goal if you promote your profile and get others viewing it.
Worth the Time and Money?
Just like with any other type of funding, you’ll spend some time to get your investors interested. You’ve got to write an enticing profile that explains succinctly what you do and what you’re looking for. Pretty photos help. You’ll have to decide what you’re willing to give investors (making sure you still have enough profit to achieve your goal). And the site you use for the crowdfunding will take a cut, so be prepared for that. For example, IndieGoGo charges 4% of the amount you raise if you meet your goal, and 9% if you don’t get to that amount (but you keep whatever amount you do raise). There’s also a third-party fee of 3% for processing the financial transactions. Build these into your budget when creating your proposal.
If crowdfunding appeals to you, give it a shot. It may be easier to get the money, especially if you’re looking for less than what venture capitalists typically want to invest, and you’ll have the fun of being involved in something cool!