In the past five years, we’ve seen a plethora of crowdfunding platforms hit the internet. And, the popularity of these “open source” funding sites seems to only be increasing, particularly with those within art communities and the tech industry.
While the goal of these platforms is to connect small business owners with investors looking for opportunities to back promising ventures or ideas, many small business owners wonder if this source of financing is a viable option for securing working capital.
Certainly, crowdfunding can be a great way to get friends, family, colleagues and peers excited about a promising new or developing business. Yet, it can be a mixed bag when it comes to actually obtaining capital to support day-to-day operations.
If you’re a business owner who is tempted to try crowdfunding to “find out” how much capital you can generate, it may be well worth your time to consider the drawbacks of launching a campaign, as well as the advantages of taking a small business loan instead.
Time and Effort to Create a Campaign
The most successful crowdfunding campaigns are those that include eye-catching content to support them. This makes sense when you consider that your campaign is actually competing against others on the platform. Campaigns that stand out in the crowd and have a particularly compelling message will get noticed and receive more funding than those that don’t quite have the same “wow” factor.Once a campaign is launched, it then needs to be promoted. If you’re a savvy social media marketer, creating buzz on Facebook and Twitter can propel your brand to new audiences and potentially generate investor interest. If you’re not into online pitching, this can be a tedious, painstaking task that doesn’t always generate sufficient results.
In other words, you may be incredibly excited about your machine fabrication business and how you’ll be able to help manufacturers in your industry with your amazing products. However, crowdfunding investors might be more drawn to the solo business owner who is making unique purses crafted from beads sourced from a local village and sharing photos of them on Instagram.
If you’re going to try crowdfunding, you’ll definitely want to consider the time and money you’ll need to create and promote your campaign. This includes photos, a video, social media channels, the development of a website and maybe even a second microsite that is focused on your crowdfunding efforts. This can cost hundreds, if not thousands of dollars, along with many hours of your time. When you tally the costs for launching a campaign, it may be faster, easier and more effective to obtain capital from a lender that doesn’t require these efforts.
No Guarantees You’ll Be Funded
When you peruse the many campaigns on a crowdfunding site, you’ll see some are incredibly well-funded, while others haven’t received even their first dollar. There are no guarantees that you’ll secure funding, even if you’ve invested in creating a compelling campaign.If you have a set amount that you need for specific goals you’re trying to achieve such as hiring more staff to cover a seasonal uptick or buying a new piece of equipment, rolling the dice with a crowdfunding campaign is not the right choice for you. An option like Kabbage that lets you apply and receive funding in a matter of minutes may be a better choice that can enable you to plan and budget what you need to succeed. It’s also important to remember that if you don’t reach your funding goal on a crowdfunding site, funds raised typically have to be forfeited.
Are you seeking a large amount of capital? Startups and small businesses are only allowed to raise up to $1 million annually from “small-dollar” investors on web-based platforms, according to the JOBS Act which passed in 2012. Thus, if you’re looking for a substantial capital infusion, crowdfunding definitely isn’t the right choice. You’ll be better off working with a private venture capital company.
Fees
Like with other types of small business financing, there are fees for raising capital via crowdfunding. Most platforms charge a percentage of funds raised that typically ranges from five to twelve percent. There are also other fees to consider such as those to process contributions.
When you add these costs to what you’ll spend on creating and managing a campaign, it may work out to be more costly than what you’ll pay to a lender for a small business loan.
The Cost of Rewards
Rewards-based crowdfunding is particularly popular with startups and new businesses because it also offers a way to test market products. Individuals contribute money to a campaign, and in return, the business provides “rewards.” For example, a jewelry designer may reward each contributor a handmade necklace. Or, a new bakery may offer each contributor a voucher for a free loaf of bread.
Any business that goes the route of offering rewards as part of a crowdfunding campaign needs to also include the investment in supplying rewards when it comes to tabulating the total cost for securing capital.
Time Constraints
Every business owner who is seeking working capital needs to carefully consider their time limitations. Applying for a traditional bank loan is a notoriously slow process that can span weeks or even months before an approval decision is made. Likewise, crowdfunding can also be slow and tedious, requiring daily monitoring and promotion.
For business owners that need money quickly, securing a source of working capital that can be accessed when it is needed is often a strategically smart decision.
Although these reasons certainly highlight why a small business loan can be a better decision for many small businesses, there are benefits to crowdfunding that can’t be denied. For some, being able to leverage the benefits of both may even be the right option. The key is considering your specific business needs, industry, and target market and choosing the right funding option that helps you achieve your goals.
