By Princess Jones
Crowdfunding for business expenses may seem like a recent trend but the process of raising money from others has always been in fashion. The Internet has just made it easier and more visible. If you’re considering this for a startup or a new project, remember that there are four types of crowdfunding — donation, rewards, debt, and equity. Each one has its own pros and cons that would affect how useful it might be for your small business.
Donation-based crowdfunding is when a donor offers money to fund your project or business but does not receive anything other than gratitude in return. In some cases, the donor may receive a tax deduction if the business is registered as an eligible nonprofit.
Donation-based crowdfunding is not as common for small businesses. Most of the time, donors are interested in charitable organizations instead. Also, donors tend to give smaller amounts than perhaps a lender or a traditional investor.
In reward-based crowdfunding, investors receive tokens of appreciation in exchange for their investment. This can be one of the products you’re raising funds for or some other merchandise related to your brand. For example, if you are crowdfunding for a movie production, a lower level might received a signed poster while a higher level might receive the finished product.
Rewards-based investors are more likely to be passionate about the project, but not experienced investors overall. You’ll need to be very clear about the terms of your campaign and incredibly transparent about the progress of the project.
With debt crowdfunding, lenders loan you money with the expectation of repayment of the principal loan plus an agreed upon interest. This is a viable option if you would like to raise large amounts of cash from just a few sources, rather than in small amounts from a number of sources.
Unlike donation- or rewards-based crowdfunding, you’ll need to prove that you and your business are financially sound. Lenders don’t want to risk their money on an iffy investment. They’ll take into account the financial health of the business as well as the credit of any principal officers.
In equity crowdfunding, investors give you money in exchange for a percentage of your business or product. Like debt crowdfunding, equity crowdfunding attracts large investment amounts but the stakes are higher. Also, it is more often used for company startups rather than product launches.
It’s important that you know exactly how much money you’ll need to be fully funded before you start an equity crowdfunding campaign. You’ll need that guideline to determine how much equity you’re giving away. Let’s say your company’s valuation would be at $600,000 but you need $400,000 to launch. That means you’ll be giving away 75% of your company to investors. That’s a lot of control to give up. Is that what you want? Make sure to figure it out before your campaign starts.