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Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.
If you want to raise funds for a start-up or to improve or grow your small business, crowdfunding might be an option. It’s an alternative to traditional investment and loans that can get your bright idea off the ground. This guide is your introduction to crowdfunding for a small business.
What is crowdfunding and can it work for you?
Crowdfunding is a form of pooled micro-investment, where money is raised from a number of individuals or groups rather than a single investor. With small business crowdfunding incentives are often offered to entice people to make an investment such as access to a special offer or a long-term offer of return on investment.
The revolutionary concept of crowdfunding is rapidly becoming a popular choice for small businesses seeking investment, allowing multiple investors to provide small amounts of funding that add up to large amounts of capital.
Crowdfunding can be a useful way to raise capital at the start-up stage or to generate funds for growth, such as when you’re opening a second location or starting a new side venture.
There are several different types of crowdfunding for small business, each of which is typically accessed via an online platform.
Advantages of crowdfunding for your small business
There are several advantages of crowdfunding for small business, including speed, ease and reach.
Fast and versatile
You may be able to raise funds very quickly if you have a crowdfunding idea that captures people’s and if you can reach a lot of people through marketing methods.
Easy to implement
You may be able to put together a crowdfunding marketing campaign more easily and quickly than a pitch to larger investors. People are often happy to invest in crowdfunding campaigns without requiring extensive background information because they tend to be investing a relatively small amount of money.
Targets specific goals
You can use a crowdfunding campaign to target a specific goal or objective, such as launching a new product line, adding extra space to your cafe or workspace raising capital through crowdfunding for small business start-ups, geographic expansion or launching a new product line.
Challenges of crowdfunding for small business
As with any form of capital raising, there are also some challenges with crowdfunding.
Organisation and administration
You’ll need to allocate time to setting up a crowdfunding campaign. This time needs to be factored into any calculation of capital required. You’ll need to be organised and have a little technical skill too.
Continual marketing and communication
Capturing the attention of investors takes some ingenuity. Then, you need to keep marketing the campaign until you’ve reached your target and perhaps beyond too. You may need to commit to keeping investors up to date with progress.
Different types of crowdfunding
There are several different types of crowdfunding for small businesses. Each offers different rewards to investors. Some are regulated by the Financial Conduct Authority while others fall outside of this remit.
Peer-to-peer crowdfunding
Peer-to-peer crowdfunding can be either loan-based or equity-based. Peer-to-peer crowdfunding can be a type of equity crowdfunding, in which investors provide capital to a small business in exchange for an equity stake in that business or for interest shares. It can also act as a loan-based fund in which investment companies promise to repay the capital over a set period of time. As peer-to-peer lending comes from individuals it can often circumvent the eligibility requirements and strict repayment schedules of traditional lending.
Donation-based crowdfunding
You can ask people to make a crowdfunding donation for no return or reward. This type of crowdfunding is most often used by charities and non-profits, or by individuals raising money for an objective such as paying for a wheelchair or operation. As a small business you might be able to encourage people to make a pure crowdfunding donation if you’re driven by an ethical goal, or if your business brings benefit to the community.
It can be a lot more difficult for businesses to achieve success with a donation based crowdfunding campaign because people may not like donating their money to help someone else profit.
Rewards-based crowdfunding
Reward-based crowdfunding also doesn’t require repaying the money raised or handing over a small stake in the company. Instead, businesses offer a series of incentives to investors, such as free products or exclusive rewards.
Profit-sharing crowdfunding
The profit-sharing crowdfunding model provides investors with shares in the future profits of the company in exchange for their initial investment. If your business performs well, each investor receives a predetermined percentage of the profits.
Hybrid Crowdfunding
As crowdfunding becomes a regular part of the financing landscape, we are increasingly seeing hybrid platforms emerge. Hybrid crowdfunding platforms tend to attract a mixture of large investors in a more traditional way and smaller investors who also want to contribute to a campaign. You can sometimes get a more experienced investor to ‘front’ the campaign and demonstrate why your crowdfunding opportunity is a good one for others to join.
Crowdfunding in the UK
There are hundreds of crowdfunding platforms accessible online today, but in the UK, there are four main platforms. Each has its own model of crowdfunding, with various pros and cons.
Kickstarter
One of the better-known crowdfunding sites is Kickstarter, which works to help start-ups raise funds for launching new products or services. Kickstarter is a platform for rewards-based crowdfunding, where companies ask for donations in exchange for various incentives. These often increase the larger the donation, so a £5 donation may generate a personalised thank you card while a £5,000 donation guarantees a VIP day out with the company, for example.
Crowdcube
Crowdcube is one of the UK’s largest equity-based crowdfunding platforms. For stakes from as little as £10, investors can receive an equity stake in your company which entitles them to a percentage of the profits. Businesses can choose one of three investment goals tiers, starting at £50,000 for seed stage investment. If a project does not meet its investment goals the crowdfunding becomes void and potential investors get their money back.
Seedrs
Seedrs is also equity-based but offers a different package to Crowdcube. Small businesses set themselves a target for fundraising and investors can add anything from £10 to £150,000 to the pot. Entrepreneurs are charged a small fee if they hit their target and Seedrs also takes a small cut of the profit from any shares that are later sold. In exchange, the company manages all investments made through the platform. Seedrs does not have the investor base that Crowdcube has but is a good choice for small businesses looking to crowdfund without dealing with hundreds of investors.
Indiegogo
Indiegogo is a flexible crowdfunding platform that boasts over 9 million investors and has funded more than 800,000 projects since launch in 2008. Unlike Kickstarter and many other platforms, Indiegogo allows companies to access funds as soon as they are invested rather than having to hit a financial target. Indiegogo specialises in retail but has supported projects across many other sectors.
Getting your crowdfunding campaign off the ground
No matter how attractive the project, product or business model is, the best crowdfunding for small business needs promotion to get off the ground. Signing up to a platform is only the first step.
Social media is a great way of spreading the word. Choosing the right networks can help appeal to the appropriate demographic. Instagram has a wide reach, while LinkedIn makes it easier to find professionals in specific industries.
Having a dedicated landing page on the company website lets people know you are seeking crowdfunding. Blog posts , links on your website, email marketing to existing customers and click-throughs from social media can all help ensure people know what the campaign is all about.
As crowdfunding is all about micro-investment, businesses can even accept payments in person at the company store or at events. Square’s mobile card reader allows small business owners to accept payments on the spot from anywhere.
