Is Crowdfunding Right For Your Business?

Is Crowdfunding Right For Your Business?

Is Crowdfunding Right For Your Business?

Over the last decade or so, crowdfunding has become a quick way to raise money for existing businesses and start-ups and is often seen as a smart alternative to the traditional bank loan.

The idea behind crowdfunding is to attract numerous small investors to reach a specified target, offering them something in return for their commitment. There are a number of different models in crowdfunding. Examples include offering a non-financial reward and delivering a return on the investment in the form of interest or shares.

The benefits of crowdfunding include the ability to reach a wider range of investors in your business project, whether it’s getting your project off the ground or introducing a new product.

While crowdfunding has all sorts of benefits, however, it’s important to understand that it may not be right for your business in the first place.

Rewards-Based Funding vs Equity Funding

There are two main different types of crowdfunding you can normally access for your business.

The first is where you give people a non-financial reward for a small donation to your cause. It basically gives you access to what might be called ‘cheap’ money. The problem with this approach is that it can be difficult to reach your intended target, particularly if you don’t get your pitch right, set your sights too high or can’t attract enough people to participate. In the end, you can finish having put in a lot of effort without reaching your target.

The second is investor or equity-based funding. This is where you ask for investment in your project and actually give away a piece f your company in return. This can have better yields than rewards-based crowdfunding but does mean that you can ultimately end up losing control of your business. You will also need to be a lot more transparent.

The number of crowdfunding and equity funding sites has increased considerably over the last few years so there is plenty of opportunity to take part. It takes a lot of work, however, and there is no cast-iron guarantee you will reach your target and get the money you need.

What Are the Alternatives?

It’s important to look at all the options when you are trying to raise money for your business. Traditional bank loans can be difficult to secure, especially if you are new venture and have no collateral to put up. Interest rates can also be prohibitive. But they can be a solid financing platform that gives you the money you need and is repaid in a way you can afford.

Other options for funding include:

  • Invoice finance: if you have outstanding invoices, you can take out loans based on these and the money can be used to plug small gaps in cash flow. Banks do provide these kind of loans but they can be expensive.
  • Asset finance: This allows you to get valuable equipment or products into your business and spread the cost usually through something like a hire purchase agreement rather than a traditional loan.
  • Merchant cash advance: Many merchant banks offer cash advances for businesses that bring in a certain amount of revenue on a regular basis. It’s important, however, to check the cost of the loan and how it is paid back.
  • Peer to peer lending: This has become more popular in recent times and there are plenty of websites that allow small investors to make loans to companies. Similar to crowdfunding, the difference is that you pay interest on the loan.

Finding the right approach to funding your business is a challenge but it’s important to look at all the options out there. While crowdfunding can seem initially attractive, it often takes a lot of effort and there is no guarantee that you will reach your target and get the money.





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