Small businesses across America are still dealing with the fallout from the events of 2020 and the resulting economic climate. Close to 100,000 small businesses that shut down temporarily have now closed for good, according to data from Yelp. While some business owners struggled to get approval for Paycheck Protection Program loans, others set their sights on alternative methods of funding, including crowdfunding.
Crowdfunding platforms have risen to prominence over the last decade and have been used to find investors for startup companies, raise money for charitable causes and launch innovative new products and technology. And as we head into 2021, it can be the jump start your business needs to recover from a rough year and experience new growth in the year ahead.
What Is Crowdfunding?
Crowdfunding connects businesses, entrepreneurs and individuals with investors small and large from around the world. Some are already loyal customers ready and willing to support your business, while others are total strangers. Crowdfunding is an important resource for new businesses looking for an injection of cash to get started, but it can also be an effective way to grow an existing business. Our primer on crowdfunding for new businesses will give you an overview of the types of crowdfunding and how they work.
How Can Crowdfunding Work for My Business?
Is crowdfunding the right choice to move the needle on your business in 2021? To find out, you need to begin by asking yourself some key questions:
Am I looking for an alternative to traditional funding? It could be that you don’t yet have the business or credit history to be granted a traditional bank loan. Or the investors you’ve approached to fund a new project haven’t been the right audience. Whatever the reason, if traditional funding hasn't worked, crowdfunding may be an alternative to help your business thrive.
Do I have supporters willing to back my business? Determine whether your products, services and business objectives align with the audiences crowdfunding platforms provide. Crowdfunding investors are typically Millennials and make up a diverse demographic of races and ethnicities. Men and women are fairly equal in their likelihood to contribute, though men are generally more likely to take bigger risks. While investors with an annual salary of over $100,000 are more likely to make larger contributions, there are more future investors in the median income range. Consider who your business and products appeal to, and whether or not they’re likely to seek out crowdfunding opportunities.
Do I need quick funding, and can I afford the fees? While crowdfunding can be an effective way to generate cash for your business, it comes with a few caveats. First, consider the fees most crowdfunding platforms take. There may be an initial setup cost, percentages taken from total investments collected and a success fee if your campaign reaches or exceeds its goal. Additionally, many platforms place time restrictions on campaigns. If you don’t meet your goal in the time allotted, the funds are returned to the investors. One last thing to consider: when pitching your big ideas, you’re putting them out there for the world to see…including your competitors. Are you prepared to risk your intellectual property in the name of crowdfunding?
What type of crowdfunding is right for my business? There are multiple types of crowdfunding platforms out there, each offering unique opportunities for your business to grow, depending on what you have to offer in return.
Reward Crowdfunding: This type of crowdfunding offers investors an incentive for pledging their dollars to your business. You may move them to the front of the line for a new product or service you’d like them to fund, provide them with branded swag or offer them the chance to have input on product designs or naming opportunities.
Debt Crowdfunding: Much like a traditional loan, this type of crowdfunding must be paid back. The upside is that this sort of lending often comes with lower interest rates and more flexible repayment terms.
Equity Crowdfunding: This kind of crowdfunding rewards investors with equity shares in your business. This is a greater risk to investors, as there is no fixed return, which means they are likely to want more evidence that your business will continue to grow in value over time.
Best Crowdfunding Sites for Small Business in 2021
There are more than 600 crowdfunding platforms out there, and the one you choose is dependent on your industry, the types of products and services you offer and your business goals. Here are some of the best you can choose in 2021 if you want to:
Reward Existing Customers for Their Loyalty
With nearly $5.5 billion pledged and close to 200,000 successfully funded projects, Kickstarter is the place to go for rewards-based crowdfunding. If you already have a loyal fan base and broad community or industry support, Kickstarter can be a lucrative way to connect with investors who want more from your business. Kickstarter takes a 5 percent fee and charges payment processing fees of up to 5 percent of every transaction. It’s a great platform if you’re looking to launch a new product this year, but remember: all campaigns must wrap up in 60 days, so you’re on a hard time line to build interest, seek funding and fulfill rewards.
Get Funding for Creative Content
Whether you’re looking to start up an industry podcast this year or offer fitness classes online, Patreon is the go-to platform to find funding for creative endeavors. Patreon offers a subscription-based service to investors, allowing them to pay a monthly fee to access your content. Costs are low to both creators and members (investors), which means you may not be able to retire on what you earn from the site, but it does offer a great low-cost way to get your creative products and services in front of interested supporters. Be aware that Patreon takes a 5 percent fee from every transaction processed.
Raise Capital and Bring on Long-Term Investors
If equity crowdfunding is the best approach for your business, Crowdfunder is the ideal platform. Crowdfunder provides an audience of more than 15,000 accredited investors looking for equity shares in businesses across a variety of industries. The platform is appropriate for both startups and growing businesses. Keep in mind that while it is free to create a profile and explore fundraising opportunities, you’ll need to pay a $299+ monthly fee if you want to move forward with launching a campaign.
Take Out a Loan for a One-Time Expense
If you need money but aren’t having luck with a traditional bank loan, LendingClub can connect you with investors who can provide your business with a one-time loan of up to $500,000. Benefits include a fixed interest rate, a 1–5 year repayment period and no penalties for prepayment. You will need to meet their eligibility requirements, which state that businesses must have been in operation for a minimum of 12 months and must bring in at least $50,000 in annual sales.
2020 was a challenging year for small businesses, and as traditional funding began to dry up, savvy business owners looked to alternative options, like crowdfunding, to keep their businesses growing. You can do the same as we head into the new year, but first, you’ll need to create a financial strategy that works. Remember that Incfile is about so much more than business formation, and we’re here to help your business grow.
Wendi is a freelance writer based in Indianapolis, IN, with over a decade of experience writing for a variety of industries from healthcare to manufacturing to nonprofit. When she isn't working on solutions for her clients, she can be found spending time with her kids and husband, working in the garden or doing more writing (of the fiction variety).