What Small Business Owners Need to Know About Crowdfunding
Guest Post from Emily Lazration, CoverWallet
More and more people are starting their own business, whether it’s to pursue a lifelong passion or to escape the monotony of an office job. Whatever the reason is, starting a business is an exciting endeavor. However, it involves a lot of hard work and determination. It also usually requires a significant amount of money which some may not readily have; this is one of the main reasons why someone may not be able to start their own company. But there’s no need to worry because there are different ways to get funding. You might be considering lending firms or bank loans, or even dipping into your own savings. But another good financing option for a small business is crowdfunding. This will pool small amounts of money from a group of investors to fund a service or project. Crowdfunding can be done easily through an online platform or even in sites designed for social networking.
Interested in crowdfunding? Here are some things you need to know:
What are the different types of crowdfunding?
Crowdfunding comes in two types: rewards-based and equity.
- Rewards-based crowdfunding – The idea is to raise funds, and in return, the investor will get a reward which can be a product or a service. Also called seed or non-equity crowdfunding, this type involves soliciting funds for a service, product or business concept without handing over any ownership to the investors. This is ideal for small businesses that do not meet the requirements to get a bank loan. This is a popular option for those in the research, computer software, multimedia, and product development industries. There are many options when it comes to this type of crowdfunding, such as Kickstarter, Indiegogo, and GoFundMe.
- Equity crowdfunding – Unlike rewards-based crowdfunding, equity crowdfunding allows people who fund the business to have a share or percentage ownership in it. It’s similar to a bank loan in terms of requirements. The main difference is that since shares are involved instead of loan payments, there’s no need for collateral. Businesses that use equity crowdfunding usually need a significant amount of money. If you are considering equity crowdfunding, make sure that your business is not listed in any stock exchange, and complies with securities and financial regulations. Fundable and Crowdfunder are two examples of equity crowdfunding.
What are the advantages of crowdfunding?
If you have a new and compelling business concept, plus willingness and determination, you’re one step closer to making your idea a reality. There’s no need to stress out about financial resources because there are various approaches to raising funds, and one of them is crowdfunding. Here are some of the benefits of crowdfunding:
- It helps market the product or service. Tapping into a large group of people to finance your small business also enables you to promote your product or service. It can help you target the right audience and introduce your service to the public.
- It will help your small business earn the public’s trust. Crowdfunding can be done through a social networking site. When your product or service gets people’s attention, you can begin engaging with them and show them that they can trust your business.
- It serves as a platform for your product or service. Penetrating a market can be tricky, considering the tough competition. With crowdfunding, you’re establishing your business presence and kickstarting your operations.
- It opens the doors for future investments. Crowdfunding is an ideal avenue for investors to become interested in your small business. Who knows, with enough supporters online, more investors will notice what you’re offering and could eventually be instrumental in your business growth.
How do you stand out from the crowd?
With so much competition out there for investor attention, it can be hard to stand out. Something that can really help is having business insurance. This will show investors that your business venture is legitimate and should be taken seriously. Here are some basic policies to consider:
- General Liability: This insurance covers claims of injury, bodily or physical, and property damage that happens at your business.
- Business Owners Policy: This insurance packages elements of General Liability and Commercial Property and some carriers may also include Crime Insurance. This will cover your business’s physical and financial assets.
- Professional Liability: This is a great type of insurance for businesses who offer advice to clients. This will cover your business from being liable should an error or ommsion occur that leads to a financial loss for the customer.
Crowdfunding has been a go-to approach for many who need more funding for their small business. It’s an effective tool but bear in mind that it may not be for everyone. For instance, access to some crowdfunding sites comes with a fee, and some sites have an all-or-nothing rule, where you won’t get to keep any money unless you meet your funding goal. Despite the caveats, crowdfunding can be a great place to start to help get your business off the ground or expand to the next stage of growth.
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