Insights into the world of small business lending and development
Which Crowdfunding Platform is Right for Your Business?
As a small business owner, you’ve probably found yourself in the position of needing extra funds to help you expand, whether you need to buy equipment or you have a new product idea you need help developing. Traditional financing like a bank loan can take months to close between the application and approval phases, and you probably don’t have the time to wait, especially if you need a relatively small amount of cash. In this case, a crowdfunding campaign could be the right move for your business and the good news is that there are many different crowdfunding options available right now.
So what exactly is crowdfunding? Crowdfunding is a way to raise funds by reaching out to a large number of people through an online platform. Small sums of money from many people can add up to the total loan amount you need. Crowdfunding usually requires that you create a creative marketing campaign with incentives to inspire people to donate.
There are two main types of crowdfunding: equity crowdfunding and reward crowdfunding. Equity crowdfunding gives a small percent of your company to investors, and may be the best option for a start-up or an established business. These can take longer and have higher fees, but typically offer higher investments. Reward crowdfunding allows people to donate in exchange for a reward—this can be a simple thank you shout-out, a version of the product before release or another gift like branded t-shirts. This is a good option when you need smaller amounts of money or have an interesting product to offer. While these are the most commonly used types for small business, you can also use donation-based crowdfunding to ask for philanthropic donations or debt-based crowdfunding, in which you are offered a no- or low-interest loan from numerous individual lenders.
So you think crowdfunding might be right for you, but you don’t know how to pick a crowdfunding platform? You’ll want to think about what type of crowdfunding you’re interested in and understand the fees charged by each platform. Here’s a quick overview of some of the most popular crowdfunding platforms.
- Kickstarter is the most popular crowdfunding platform for reward crowdfunding, particularly to finance new and innovative products. After applying and being accepted by Kickstarter, you create your campaign, designate reward levels, pick a deadline of one to 60 day and then promote your campaign. Funding on Kickstarter is all-or-nothing—you must reach your funding goal to receive any funds. Kickstarter collects a 5% fee and their payment processor collects a 3-5% fee, which are only paid if your product is successfully funded.
- Indiegogo is also a popular platform for reward crowdfunding, but doesn’t require you to submit an application like Kickstarter. Indiegogo lets you choose between flexible or fixed funding, which determines if you get paid whether or not you meet your goal. They also offer marketing tools and other resources to help you promote your campaign. Indiegogo charges a 5% fee, plus 3% + $0.30 in third-party credit card fees.
- SeedInvest vets start-ups on its platform through a comprehensive due diligence process. Investors can then invest with as little as $500, with start-ups typically raising more than $100,000. SeedInvest fees vary based on your business and can include a 7.5% placement fee on the total amount raised.
- Crowdfunder lets you attract equity investors through a “private deal-room,” where you offer up your business documents and set the terms for investors. Crowdfunder requires that businesses have an established proof of concept and charges fees start at $299 per month, so this is a better option for a business with a few years of operation under its belt.
- Microventures connects start-ups with angel investors who have between $1,000 and $50,000 to invest in a business. You pay $100 to submit a project, another $250 for due diligence and then 5-10% of the total funds raised if the project is successfully matched.
- GoFundMe allows you or your business to collect donations given purely philanthropically—you are not required to offer a reward or pay back the donors. GoFundMe doesn’t require you to meet your goal or set a deadline and the only fees charged are the credit card processing fee of 2.9% + $0.30.
- Kiva is a crowdfunding platform that typically involves interest free debt financing—many lenders give small amounts towards a larger loan that the entrepreneur can pay back over time without interest. Kiva does not take a fee on its loans and like Kickstarter, Kiva requires that a loan receive full funding to disburse funds. Kiva also requires that entrepreneurs on their site be borrowers who traditionally struggle to access financing or whose business creates social impact for their community.
There’s no one-size-fits all approach to crowdfunding, so make sure you know what you want to achieve with your crowdfunding campaign and take time to compare your options. Crowdfunding is not always an easy endeavor, and you want to take time to plan your campaign to ensure you have a quality idea and pitch. Make sure to check out other Venturize resources, like our Marketing and Research page, to get your business crowdfunding ready.