Crowdfunding for Small Business - Dun & Bradstreet

What is Crowdfunding?

Crowdfunding is the idea of soliciting individuals, from close relatives to strangers across the world, to help fund your business through small investments. The digital age has allowed small business owners to set up crowdfunding campaigns online and forgo big banks, which often reject a high percentage of applicants.

Hundreds of online crowdfunding platforms give entrepreneurs the ability to set up their campaigns in a number of ways. From securities-based crowdfunding to rewards-based crowdfunding, small business owners can create an engaged community of partners.

How to Get Started

There is no secret to crowdfunding success, but rather a recommended formula that can be applied to campaigns of all kinds. This involves answering important questions and following pivotal steps.

Step 1: Determine if Crowdfunding is Right for You

Crowdfunding is about connecting and engaging with a community of people interested in your project, cause, or campaign. Before setting up your campaign, ask yourself:

1. 1.Do you have the time and resources necessary to run a campaign? A crowdfunding campaign is more a marathon than a sprint.
2. 2.Is your venture or new idea something people will rally behind online?

If you answered yes to both, consider implementing a crowdfunding campaign.

Step 2: Determine if Crowdfunding is Right for Your Stage of Business

Crowdfunding is typically used by:

1. 1.New businesses to raise equity and establish legitimacy.
2. 2.Established businesses to raise debt financing or funds for new products/services.
3. 3.Nonprofits to raise donations.

Crowdfunding can benefit various industries and business structures, such as brick-and-mortar shops, technology ventures, manufacturers, and artists. Most effective campaigns leverage their stories to create social capital and use crowdfunding as both a fundraising and marketing tool.

If raising capital is your only goal, consider alternative or traditional funding options.

Step 3: Choose Which Platform is Most Appropriate for Your Campaign

There are hundreds of crowdfunding platforms, each with different value propositions and target markets. Consider:

• ​Demonstrated Success: Look for similar campaigns that have succeeded.
• ​Provided Resources: Does the platform make your life easier?
• ​Insights: Does the platform provide information on successful processes and campaign performance?
• ​Existing Community: Is there an existing community that cares about your campaign's focus?

Some prevalent business-related crowdfunding platforms are:

• ​Indiegogo: Offers support throughout the process and a marketplace for research.
• ​Kickstarter: Focuses on creative projects and a vibrant, supportive community.
• ​Fundable: Dedicated to helping companies raise capital with hands-on service.

Understand the differences between rewards-based (donation-based) and security-based crowdfunding. Rewards-based involves perks for contributions, while security-based includes debt and equity crowdfunding. Laws vary for equity-based crowdfunding, so consult a lawyer if needed.

Decide between a fixed or flexible campaign. Fixed campaigns require meeting a monetary goal to receive funds; flexible campaigns allow you to keep what you raise, often with a higher platform fee.

Step 4: Build a Knowledgeable Team with Experience

Your crowdfunding campaign requires a knowledgeable and experienced team to help implement your strategy and assist with networking.

Step 5: Create a Detailed Business Plan

Be prepared to share extensive information about yourself and your company. A detailed business plan will answer questions, outline your company's features, and improve your campaign's chances of success.

Step 6: Plan Outreach and Social Media Strategies

Draw from your own community and their networks. Relationships must be formed and maintained, updates are essential, and your plan must be demonstrated. Know your target market, strategize your marketing, and make your story precise. Including a video is often necessary and can significantly increase campaign success.

Step 7: Prepare Before Your Campaign

Preparation is key. Determine your personal network donors, how to present your story, your visuals, and your goals. Many times, you need a prototype, business plan, and even sales numbers for people to invest.

Step 8: Be Realistic and Honest

Outline why and what you need money for. Investors prefer specifics over arbitrary requests. Realism and honesty help shape your needs and show your audience an achievable goal.

Step 9: Create a Sense of Urgency

Campaigns often last around 45 days. Creating urgency prompts people to take action and helps you reach your goals faster.

Step 10: Start Campaign With 30% Funding

Tap into your personal networks before launching. Aim to raise 30% of your capital from friends and family first to legitimize your campaign. Then, begin your media campaign.

The Challenges of Crowdfunding

Crowdfunding presents opportunities but also challenges:

• ​Timing: Certain times of year may be less effective for fundraising.
• ​Lender Exhaustion: The abundance of campaigns can overwhelm potential contributors.
• ​Tax Implications: Contributions are taxable, and incentives may be subject to IRS taxation.
• ​Competition: Standing out among thousands of campaigns can be difficult.
• ​Relationships: Maintaining relationships with contributors is crucial but time-consuming.

Other Types of Lending

Alternative loans cover a broad array of business loan options outside of traditional bank loans. These include online lending, merchant cash advances, factoring, and revenue-based loans. Alternative loans are often more flexible and faster to approve than traditional bank loans.

Traditional loans are more appropriate for businesses seeking larger sums. Typically, a business must be established for at least two years and request at least $250,000. Traditional loans offer lower interest rates, tax benefits, and full ownership retention.