How to use crowdfunding for business

You have a great idea for a new business, but your biggest hurdle to getting the idea off the ground is a lack of money. So, until you can raise enough cash to get started, your business is still just a dream.

You’re not alone. Out of every small business that fails, 38% do so because they run out of funding, making lack of capital the second most frequent cause of small business failure.¹ In the past, you could either borrow from friends or family or take out a business loan from a bank. But that limited you to just the people you knew and the readily available banks. If none of those worked, you were back to square one.

Crowdfunding has helped many entrepreneurs overcome this monetary hurdle. Read below to learn more about crowdfunding and how it could get you the capital that you need to finally go to work for yourself.

What is business crowdfunding?

Investopedia describes crowdfunding as the use of small amounts of capital from many individuals to finance a new business venture. These investments are found through channels such as social media and the 600 available crowdfunding sites worldwide that bring investors and entrepreneurs together.

Crowdfunding opens doors to many people who wouldn’t normally be a part of something new. Entrepreneurs like it because it opens their business to bigger pools of potential investors and removes the need to rely on large funding from a few sources.

Who uses crowdfunding?

Small businesses are increasingly relying on crowdfunding, with everyone from fashion designers to mobile tiny home cafés raising funds.

Many potential investors find the transparency of crowdfunding attractive. Companies are making their financial information, strategies and goals readily accessible on crowdfunding platforms, which helps potential contributors feel comfortable being a part of business crowdfunding.

Crowdfunding Examples

As modern means of communication and money sharing have grown, crowdfunding has also increased in popularity. It helps that great success stories have come from this new form of investing.

For example, Occulus Rift, a California-based manufacturer of virtual reality headsets, raised $2.4 million via the crowdfunding site Kickstarter. Facebook later acquired Occulus Rift for a reported $2 billion.

You don’t need groundbreaking technology to successfully crowdfund, though. Look no further than Popsocket, a simple device that makes holding cell phones easier. Despite its basic design, the company found traction on Kickstarter and today boasts footholds in markets around the world. Brooklinen achieved similar success with little more than some quality bedding and a creative pitch for it.

What are the different types of crowdfunding?

Usually, crowdfunding offers special incentives in exchange for donations, known as reward-based crowdfunding. Such perks can include anything from a mention of your name in credits on a film to a chance to obtain a free product or to hear personally from an author. Offering these perks can also be a way to avoid lending fees, interest payments, and giving away company equity in exchange for the loan.

That said, there are four general categories of crowdfunding, each with a different way that investors see their capital in action:

Reward-based crowdfunding

Not sure if people are willing to invest free of charge? Consider reward-based crowdfunding. This type of crowdfunding rewards investors with some form of compensation in exchange for their contribution. This reward can be whatever you see fit – products, coupons, anything.

Equity-based

Think you’ve got a million-dollar idea? You can crowdfund by offering investors a stake in it. Equity-based crowdfunding compensates investments with equity in the company. Just be sure you’re prepared to give up whatever percentage of your company you offer.

Lending-based

You don’t need a bank to get a loan. With lending-based crowdfunding, you can borrow money from investors using the same model. You’ll still need to set up interest rates and repayment plans for any money you receive, of course.

Donation-based

If you have an idea that could serve everyone’s best interests, they might be willing to donate without anything in return. That’s donation-based crowdfunding in a nutshell, you receive donations, and that’s it! Consequently, this model is most often used by non-profits like charities.

How you can use crowdfunding to create interest in your business

Small businesses have cumulatively raised as much as $1 billion in a single year.² So, how do you get your new business idea ready and grab a share of that money?

Follow these tips to help formulate a pitch that will draw in investors:

• Create a strong business plan
• Know who your audience is
• Include a clear title and short description about your business
• Tell an engaging, yet simple, story
• Back your pitch with facts and data
• Show an estimated project timeline
• Set up an engaging crowdfunding page

Crowdfunding platforms for small businesses

Crowdfunding can feel like a monumental task, but getting started is sometimes the hardest part. Here are several crowdfunding platforms you can use:

• Kickstarter – Remember those success stories we mentioned earlier? They all came from Kickstarter, a rewards-based platform founded in 2009. Kickstarter simplifies the crowdfunding process and makes it more accessible to all kinds of businesses owners and entrepreneurs.
• GoFundMe – You might associate GoFundMe with charity more than business investment, but you can use the platform to crowdfund just about anything. GoFundMe is historically a donation-based model, so if your business isn’t a non-profit, make sure you can outline how it can benefit others.
• Lending Club – Want to try the lending-based model? Lending Club could be the right platform for you. The platform uses its own loan models, so if devising payment plans sounds too complicated, Lending Club can simplify the process for you.

How to set up a business crowdfunding page

First, you’ll need to pick an appropriate crowdfunding outlet. Start by building a standalone page, known as a lead capture page, to provide basic information about your small business prior to the launch of a crowdfunding campaign.

Some successful launches include enticing offers, such as a contest, to get users to input their email addresses. Think of these as virtual equivalents to a signup sheet or fishbowl on the counter of a brick-and-mortar store where customers provide their information in exchange for possible prizes. A lead capture page can work in the background to generate a list of interested people that you can then send to the crowdfunding site when you launch.

Then decide how much funding you plan to raise with your campaign. The Balance Small Business explains that this “is a very strategic decision because many platforms function as all-or-nothing fundraising.” Meaning, if you don't hit your fundraising goals, you won’t get anything.

Setting an achievable goal is also important because reaching financing milestones is another way to help attract other investors and to create momentum around your venture. Once your business starts thriving, you may garner the attention of a wider audience that may enable you to raise money in subsequent rounds of funding and, ultimately, increase sales.

Once you’ve done those, keep the momentum going and stay in contact with your investors. They’ll want to see how things are progressing and might talk some of their friends into joining this new venture.

Getting started with crowdfunding

If you think crowdfunding for your small business may be a good fit, read more about these 5 considerations for small businesses using crowdfunding.

For more information and resources to help your company grow, check out the Nationwide Business Solutions Center.

Crowdfunding for business FAQs

Is crowdfunding allowed for LLC?

Yes, an LLC can crowdfund. And because so many enterprises begin this way, it’s a rather common practice. Just be prepared to prove your legitimacy. Depending on the platform you use, you may have to provide details like profits or years in operation.

Does crowdfunding have to be repaid by the business?

That depends upon the crowdfunding model you’ve chosen. Donation-based crowdfunding requires no repayment of any kind. However, if you chose a reward or lending-based model, you can expect to pay your investors back through some means. These exact means will differ depending on the terms you set, but financial compensation is often involved.

What are disadvantages of crowdfunding?

Crowdfunding does have some downsides. The first, and possibly largest, is that it’s not guaranteed to work. You can put your idea out there, but if investors aren’t inspired by your pitch, you may walk away empty-handed. Another downside is that, if you are successful, you’ll be carrying some expectations. If you took donations, you may face some public backlash for failing to achieve the goal you set (and advertised to donors). If you used a model that requires repayment and you are unable to do so, you could encounter similar issues, possibly even legal trouble. Be sure to set reasonable goals for yourself to avoid these problems.

Is crowdfunding taxable to a business?

Simply put – yes, the IRS does consider crowdfunded money taxable. However, that can vary depending on the nature of the money (donation, investment, etc.) and the purpose it’s used for. For example, in a lending-based campaign, a payment in the form of a loan would not be taxed. Be sure to check the taxability of the payments your campaign is seeking so you can provide that information to would-be investors.

Sources:
[1] “Small Business Statistics Of 2023,” Kelly Main, https://www.forbes.com/advisor/business/small-business-statistics/ (Accessed August 24, 2023).
[2] “U.S. Businesses Raise $1.04 Billion through Crowdfunding in 2018, up from $915 Million in 2017”, https://prnewswire.com/news-releases/us-businesses-raise-1-04-billion-through-crowdfunding-in-2018--up-from-915-million-in-2017--300761362.html (Accessed August 24, 2023).