At a time when banks have severely restricted loans available to small businesses and entrepreneurs looking to start new businesses, crowdfunding can be an invaluable source of capital. Crowdfunding is, as its name suggests, way for a business or charity to raise capital from a group of people. In essence, a business or charitable organization looking for start-up funds or money for expansion solicit small donations from a large pool of individuals rather than seeking a loan from a bank or large donations from a small number of investors.
The contributions are more like donations than traditional investment in that givers receive no stock or share in the business itself. Their goal in giving is tied either to their relationship either the business owner or an affinity for the project itself. The business will, however, often offer incentives and rewards for giving, such as a year-long 20% discount on items purchased at the business.
Crowdfunding is almost exclusively an online endeavor. The power of social networking comes fully into play in that a person starting a business can access, through online friends and friends of friends, a pool of potential contributors that would otherwise not be available to them. As a result of this, several crowdfunding sites have cropped up in recent years to meet the demand.
The most popular of these crowdfunding sites are Kickstarter, Indiegogo, and GoFundMe. Each of these sites has its own specific features, and of course its own fees.
Kickstarter: As with any site of this kind, the first thing you do is create an account for your project with the project details. This will be reviewed by their staff for approval. They do not accept projects raising funds for charity or causes. You must reach your funding goal to receive any funds (if the goal is not reached contributors are not charged). They charge a 5% fee on each successful project.
Indiegogo: With Indiegogo you sign up just like you do with Kickstarter, but Indiegogo does allow charitable projects and other causes. They also give the option of having to meet a specific goal to receive any funds or receiving what has been donated even if the goal is not met. The second option has higher fees than the first. Indiegogo charges a 4% fee on successful projects and 9% on projects that failed to meet goal (if you chose that option).
GoFundMe: GoFundMe is different from Kickstarter and Indiegogo in that you can raise funds for anything, from a business start-up to remodeling your home to a ski trip in Aspen. They charge 5% from each donation.
Crowdfunding may not be the perfect fund-raising vehicle for every organization or every project, but it can be an invaluable option for small business start-ups. They can raise funds without incurring a large amount of debt, and it has the added benefit of giving the new business publicity while raising needed capital. And in today’s financial environment, crowdfunding has more likelihood of success than going to your local banker.