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Crowdfunding: is it right for your small business?

5-minute read

Jessie Day

24 July 2020

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Crowdfunding is a game-changer for thousands of small businesses. But how does it work and where should you go to get started? Crucially, do you pay back crowdfunding once you’re rolling?

According to Yahoo Finance, the global crowdfunding market is set to grow at a rate of 16 per cent over the next five years. Social media has played a big part, providing immediate, clear marketing campaigns and ready-made platforms for businesses looking to mobilise engaged audiences, raising cash while avoiding the bank.

Here’s how it works, and how you can get started.

What is crowdfunding?

Crowdfunding is a strategy for raising finance. You ask lots of people at once for small individual amounts of money, usually through an online platform. You’ll need to decide on a target figure, pitch the details of your next business phase or project to your would-be ‘crowd’ of investors, and then raise the full amount to go ahead.

Are there different types?

Yes, and it’s important to remember that some forms of crowdfunding – for example reward and donation-based crowdfunding – aren’t regulated by the Financial Conduct Authority (FCA).

Here are some of the different types you can use:

  • investment-based crowdfunding – people invest in your business for a stake in return
  • loan-based crowdfunding – money is lent to your business at a set interest rate, also known as peer-to-peer or peer-to-business lending
  • reward-based crowdfunding – you give a reward in return for someone’s investment, usually linked to the project you’re promoting
  • donation-based crowdfunding – people donate to your charity or cause, sometimes for something promised in return

How does crowdfunding work?

You’ll usually use an online crowdfunding website to register your project and start raising money. We’ve listed a few of the most popular sites below.

Getting started (and the best crowdfunding sites for small business)

With a huge global market, there are lots of options for where to host your crowdfunding project. Here are a few of the UK’s most popular:

  • Crowdfunder – currently 100 per cent free for fundraising in response to Covid-19
  • Crowdcube – used by everyone from Monzo to tiny fledgling startups
  • Seedrs – features Covid-19 support and £935.3 million in investment to date
  • Kickstarter – specifically for creative projects and ideas
  • Indiegogo – focused on early-adopter investment for new tech and design projects

Once you’ve picked your platform, you’ll need to register your project. Remember, as well as registering, you’re telling your audience about you, what you’re trying to achieve and why their investment is so important, or valuable.

Hitting your target

Once your campaign’s set up, it’s time to promote it on social media, your email list and just about anywhere you have an engaged audience. Explain how their small donation is going to help you make your business better for them, as customers. Keep them up to date with how the fundraising’s going, and drive momentum.

Remember, many crowdfunding websites or platforms take an all-or-nothing approach. That means, if you don’t hit your target, no money is paid. So it’s worth going all-out on your other channels to raise awareness.

Where’s the money?

Investors can pledge money at any point during your campaign, as long as it’s within the timeframe you set from the start. Once you’ve hit the target and the campaign closes, your crowdfunding website will take a cut from the total amount raised.

You may also need to factor tax responsibilities into your crowdfunding plans. For example, reward and investment-based crowdfunding is usually classified as income, and may be subject to income and sales tax.

Do you pay back crowdfunding?

It depends on what kind of crowdfunding you’re going for. With donation and reward-based crowdfunding, people are putting their money in for lots of different reasons – often through personal or social motivation – but not usually for a hard financial return.

Loan-based crowdfunding means that investors get their money back, usually with interest. And with investment-based crowdfunding, people put money in, usually for a share of your business. So they’ll see the value of their shares rise and fall, but you don’t need to pay back their investment.

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Crowdfunding pros and cons – is it right for my business?

Here are a few of the biggest advantages that come with crowdfunding, plus some of the bug-bears:

It simplifies your pitching (and avoids the bank)

Traditionally, to secure investment and finance you’d probably need to hit a few different banks and potential investors, tailoring your pitch and plans accordingly. Crowdfunding means your campaign, details and progress are all hosted in one spot, for would-be investors to assess at their leisure.

Yes, you’ll need to put targeted effort into promoting your crowdfunding to the right audience. But you won’t be spending time preparing for pitch after pitch.

It’s usually quick, with no upfront fees

You’ll need to be organised, with somewhere other than your pitch for investors to go and get acquainted with your business. But once your campaign is live, you can raise funds relatively fast, without waiting out a lengthy decision process from a bank, for example.

Many sites also feature no upfront fees for setting up and running your campaign, making the money even more accessible. But remember, fees and percentage cuts may apply once you’ve reached your target.

It gives an attention-grabbing story (and connected fanbase)

The nature of crowdfunding means that your investors are usually engaged with your project – more likely to click on your emails, for example, or stick with your product when loyalties are tested.

A great example is UK beer brand BrewDog, who’ve raised millions of pounds through innovative crowdfunding since launching in 2007. It’s now a household name, but part of its secret is a huge community of super-loyal small-level investors, as passionate about the ‘anti-business business model’ as they are about the beer.

You need to be super-clear

With crowdfunding, you can’t get on a Zoom meeting with a potential investor, look them in the eyes and explain your complex but brilliant project. Your online pitch space needs to be clear, attention-grabbing and easy to invest in, even if you’re asking the audience to take a risk.

On the plus side, if it falls flat, you’ve secured some valuable market research and some platforms will let you ask for feedback.

It requires effort

Crowdfunding isn’t just a case of signing up to a platform, handing over a few details and some nice wording about your project, posting it on social media and waiting for the money to start rolling in. You’ll need to push it every step of the way, reminding people that time’s running out, and maybe spend a bit of money on promotion, gearing up your website for higher traffic.

You’ll also need to be on-hand to answer any questions, man your customer service or social media channels and let no scrap of engagement go to waste.

Finally – make crowdfunding work for your business

So now that you’ve secured your funding and have a new crowd of avid, excited followers and investors to boot, what next? Deliver, or disappoint. The harsh reality of crowdfunding is that you’ve set very public expectations, and failing to meet them or missing promised timescales will frustrate people, turn them off to the product, and put you in the firing line for bad publicity.

A good tactic here is to be really upfront, stay connected with your audience and share your journey with them. They’ll be much more forgiving if they’re up-to-date with your challenges, and excited for a product that’ll be worth it in the end.

Have you used crowdfunding to get your business to the next stage? Let us know in the comments.

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We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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