You have the perfect idea for a product or service. You’ve done your homework on the market and created a business plan. You might have started operations. But to take your business to the next level, you need funding.
New entrepreneurs often struggle to find financing because most lenders will issue loans only to established companies. However, that doesn’t mean you’re out of luck. Crowdfunding for business capital can provide you with the cash you need to grow your company.
How does crowdfunding for business capital work?
Crowdfunding is a method of gaining money for your business. Rather than going through banks or traditional investors, you tap into friends, family, and other individuals who might be interested in your product or service.
Typically, you post your project online and share it on social media to get more attention (and money). The crowdfunding site gives you a platform to share and promote your product.
Crowdfunding isn’t a loan, and you never have to repay the money. Instead, contributions are more like donations. To thank their supporters, many entrepreneurs offer incentives to donors, such as early access to product launches.
According to the Small Business Administration (SBA), crowdfunding can have other benefits beyond raising money. In the SBA’s report on the current state of crowdfunding, the organization found that crowdfunding can be a useful proof-of-concept tool. If a crowdfunding project gets fully funded and attracts attention, the entrepreneur can use that as evidence of the product’s demand when they talk to traditional investors.
Plus, a successful crowdfunding campaign can get publicity for your product. Some campaigns go viral and get attention on news websites and blogs, which can help drive sales.
There are many crowdfunding sites you can use to raise money, including:
8 tips to encourage users to invest in your company
Although crowdfunding can be an excellent way to make money, it’s more challenging than you might think. You can’t just create a project and post it online and expect results; it requires a lot of work.
Here’s how you can encourage donors to contribute to your campaign:
- Look at successful campaigns: Before you write a draft of your project, take the time to research successful crowdfunding campaigns. Look for what those entrepreneurs did well, such as design, thoroughness of information, and valuable donor incentives.
- Share your plan: Your campaign should feature a thorough business plan that highlights your market research, competitive analysis, financial forecasts, and expected returns. This is your chance to showcase what makes your product different and why it’s such a great idea.
- Have a professional image: To succeed, your campaign needs to look polished and professional. You might want to hire a graphic designer to create a logo and graphics for you, and it’s smart to hire an editor or copy editor to review the copy and ensure it’s as persuasive as possible.
- Plan a marketing campaign: Setting up a crowdfunding campaign doesn’t guarantee returns. To increase your chances of hitting your goals, build a marketing plan to promote it. Draft social media posts, create graphics and videos, and develop a list of media contacts and social media influencers who might be interested in your product.
- Tell your story: Donors need to believe in you, not just your product. Create a section that describes your background, education, work experience, and how you came up with your product or service concept.
- Demonstrate your commitment: Many contributors want to see that you’ve invested your own money into the company. If you aren’t financially committed to your business, why should they donate to you? In your campaign, list how much you’ve invested and the sacrifices you’ve made to make your dream a reality.
- Boast about achievements and progress: You can encourage new donors by posting about your achievements and the progress you’ve made. For example, if the United States Patent and Trademark Office granted you a patent or you successfully created a working prototype of your design, share that on your campaign site.
- Share with everyone: Once your crowdfunding campaign is up and running, share it with everyone you know, including friends, family, and business contacts. You also can reach out to other professionals in your industry to see if they’d be willing to share it.
Drawbacks to crowdfunding
Crowdfunding can be a useful source of business financing, but there are some drawbacks to this approach:
You might not get the money donors pledged: On some crowdfunding platforms, such as Kickstarter, the campaigns are all-or-nothing. If you receive some pledges but don’t reach your funding goal, you don’t get any of the money. You can access the funds only if you hit your goal.
There’s no guarantee it’ll work: You can do everything right with your listing but still fall short of your goal. Crowdfunding isn’t a secure source of funding.
The pressure is on: If your campaign meets its funding goal, you can access the funds. But you’ll also be subject to intense pressure. Your contributors (from those who donated $10 to those who donated $10,000) will expect regular updates and progress reports. If you fail to deliver, the backlash can be severe.
3 alternative sources of funding
If you need a more secure source of financing, crowdfunding might not be for you. To get the money you need to grow your business, consider these three funding alternatives.
1. SBA loans
Many banks, credit unions, and financial institutions offer business loans through the SBA. Depending on your needs, you could borrow as much as $5.5 million. You can use this money to expand your inventory, buy new equipment, or even set up your office. As an added perk, business loans are separate from your personal finances.
Use our eight-step guide to SBA loans to get the funding you need.
2. Personal loan
If you don’t qualify for a business loan, consider applying for a personal loan. Personal loans tend to be easier to get than business loans, and you can get your money in days instead of weeks or months.
Most personal loans are unsecured, meaning you don’t have to put up any assets as collateral. Although personal loans have lower maximums than business loans, you could get up to $100,000 for your business needs. Plus, if you have good credit, you could qualify for a low-interest personal loan and save money over the length of your repayment term.
3. Credit cards
If you need access to credit regularly rather than for a one-time purchase, getting a new credit card might be a better choice than taking out a loan. Credit cards are revolving debt rather than fixed debt. That means you can continually use your credit line. As long as you keep up with your payments, you can use your credit card for years to pay for your ongoing business needs.
Launching a business
Finding financing is one of the toughest aspects of starting a business. Although crowdfunding for business capital can work for some people, it’s wise to pursue several funding options so you can meet your goals.
If you have an idea for a product or service but don’t know where to start, learn how to start a business in just four steps.
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