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. A Gallup poll said that 25% of Americans cite lack of income and personal savings as the reason they never took the plunge. 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.

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.

What are the different types of crowdfunding?

Most commonly, 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

Investors receive a reward (a gift, really) for their investment.

Equity-based

Investors receive equity stake for their investment.

Lending-based

Investors receive shares of the company.

Donation-based

This format works well for non-profits, with investors acting as donors

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. So, how do you get your new business idea ready and grab a share of that money?

• 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

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’re 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.

Start now

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.