Before proceeding with a crowdfunding campaign, it’s important to factor in the potential advantages and disadvantages to determine if it’s a suitable option to raise funds for your business. For businesses considering this route, we’ve put together a list of the pros and cons of crowdfunding to help you prepare for your campaign.
Pros of Crowdfunding Explained
Crowdfunding can be a great opportunity to obtain funds for your business. Funds raised can be put toward developing products, growing your team, or promoting a new idea. It is an alternative to getting a small business loan for businesses that may not qualify and allows for networking opportunities with investors.
1. Various Types of Investment Options
There are a few methods of crowdfunding that you can offer investors to partake in. Each provides a different form of return, and you can pick the most sustainable type for your business. This means you can choose to pay funds back over time, give rewards, or offer equity stakes if you lack the budget.
The investment options are as follows:
- Donation-based: This includes a donation to your business with no expectation of return.
- Debt-based: This requires you to repay your investors with applicable rates and terms, similar to a loan.
- Rewards-based: Businesses provide an incentive to invest rather than having debt or offering equity stakes.
- Equity-based: Investors can contribute funds in exchange for an ownership stake in your business.
2. Low-risk Way to Source Funds for Your Business
Crowdfunding is generally a lower risk option than obtaining traditional financing like other startup business loans. While you may have to offer some form of return to your investors, you’re not exactly locked into rates and terms. To get a financial boost, you can tailor your crowdfunding campaign in a way that’s sustainable to your operations and raise funds from a variety of sources.
3. Support and Guidance From Seasoned Investors
Not all investors will have business experience. However, if you attract the interest of seasoned investors who want an equity stake in your business, they may be able to offer you support and guidance regarding the next steps of growing your business. Chances are, they’ve been in a similar position and will help you to ensure a return on their investment.
4. Reach a Wider Audience of Interested Investors
Crowdfunding efforts are usually hosted on an online platform, which enables your campaign to be seen by a broader audience. Depending on how you market your campaign, crowdfunding can attract investors of all backgrounds, new and experienced. It also allows for investment contributions of all sizes, big or small.
Check out our guide for the best crowdfunding sites if you need a starting resource.
5. Develop Your Business Goals Further
Crowdfunding is a great opportunity for both potential investors and customers to learn more about your business and the products you offer. This is a chance to showcase your existing developments, demonstrate your products and services, and promote your business goals.
6. Promotes Growth for Future Funding Opportunities
If you end up scaling your business and provide good communication and returns with investors, you’ll likely be able to secure repeat investors for future funding opportunities. Keeping your promises can foster important relationships and provide valuable networking opportunities for you and your business.
7. Limited Restrictions on Funds Utilization
As long as you make good on your intentions and use the funds you’ve raised for business purposes, there are no restrictions as to how exactly you can utilize them. Of course, this may differ depending on the regulations enacted by the crowdfunding platform you use but, generally, the funds are quite flexible.
8. Promote Campaign Across Multiple Platforms
You can market your campaign across multiple platforms and maximize your fundraising efforts. This can also act as a fail-safe in case you miss your funding target on one or more platforms. It also helps to spread the word regarding your business, which is valuable to small or startup businesses with limited resources.
Cons of Crowdfunding Explained
As with any form of financing, there can be potential risks and disadvantages to crowdfunding. Before proceeding, consider the following drawbacks when deciding if crowdfunding is suitable for you and your business.
1. High Expectations of Return on Investment (ROI)
Depending on the crowdfunding method offered, there can be high expectations from investors to see a valuable return on their investment. You’ll need to keep your promises and deliver on your expectations of company growth. Otherwise, you can risk your reputation and business failure.
2. Risk of Missing the Funding Target
It’s common for crowdfunding efforts to have a low success rate. This is in part due to some crowdfunding platforms requiring you to meet or exceed your fundraising target; otherwise, the funds will be returned to those who made an investment or donated money. While it’s generally a low-risk endeavor, it can be unfruitful of your time and campaign efforts to potentially end up with nothing, so be sure to set a goal that you deem achievable.
3. Difficulty Gaining the Attention of Investors
It can be time-consuming to market your business and generate interest in your products and services. You’ll need ample time to plan, develop, and market your campaign to gain the attention of investors. This can make things tough if you need funds quickly and may not be the best option if you’re looking for a quick turnaround. Otherwise, you risk a failed fundraising attempt due to a lack of interested investors.
4. Saturated Market
Standing out from the crowd can be tough, especially if your business is in a saturated market. Many businesses use crowdfunding as a way to source funds, and if the market need of your product is overcrowded, there’s the possibility that you’ll have some competition. You’ll need to demonstrate what sets your business apart, and why you’re worth the investment.
5. Imitations of Your Product Can Increase Competition
Since crowdfunding is available to businesses of all sizes and industries, there’s an opportunity for competitors to offer similar developments that imitate your business. You should take legal precautions to protect your ideas and intellectual property.
6. Limited Campaign Timeline
You’ll have a set time limit as to how long you can raise funds for your campaign. This can be stressful if you’re not aptly prepared and, once again, it creates challenges if you fail to meet platform expectations and wind up empty-handed.
7. Owing Percentage Fees to the Platform
Some platforms may charge a percentage fee for the funds you raise. You’ll need to include this in your initial campaign budget, as it can get pricey if you don’t plan for this obstacle ahead of time. This is especially important to keep in mind if you miss your funding target and funds are returned, as you’ll then have to pay any applicable fees out-of-pocket.
8. Strict and Varying Regulations of a Platform
Certain rules may be applicable to some platforms that may impact how you plan your campaign. These regulations can vary; however, you’ll have to do some research to understand any applicable restrictions and adjust your expectations accordingly.
If you think crowdfunding might be suitable for your business and are ready to get started, check out our guide on how to crowdfund a business.
Frequently Asked Questions (FAQs)
There are a variety of platforms available to businesses seeking crowdfunding investors. They can be found by networking or most commonly via an online platform.
Yes. As long as funds are used for the intended purpose of further growing your business, there aren’t restrictions as to how the funds can be used—unless defined by the platform utilized.
It depends on the type of investment contributed. If a debt-based investment was made, then yes. This is similar to a loan, in which funds are repaid over a period. Funds don’t have to be repaid if they are 1) equity-based, where you instead offer equity stakes; 2) rewards-based, where you offer a reward to the investor; or 3) donation-based, which requires nothing in exchange to the investor.
Bottom Line
Crowdfunding can be a great option for small businesses needing to raise capital. Considering crowdfunding pros and cons can help you decide if raising funds via this method is your best option. There are a variety of factors to consider before pursuing this route, and the advantages and drawbacks should be weighed accordingly to ensure the continued success of your business.