Do’s and Don’ts of Crowdfunding for Your Small Business

To start and grow a small business requires a lot of capital. It might be daunting if you do not have a lot of money to get started. However, crowdfunding is a good place to get started. Before you start crowdfunding, there are some important do’s and don’ts to consider for your campaign. Read on to learn more about these crowdfunding tips to help you get closer to success.

Choose the Right Type of Crowdfunding

When people think of crowdfunding, most people think of GoFundMe or Kickstarter. Many people use those, but the truth is that are several types of crowdfunding to consider and it is important that you pick the right one for your small businesses, depending on the situation.

There are four types of crowdfunding which include reward, debt, donation, and equity. Equity crowdfunding gives investors a portion of the company in exchange for their investment. Debt crowdfunding is borrowing money against your business. You receive money from lenders rather than investors. Rewards-based crowdfunding offers investors rewards for small investments. Donation crowdfunding does not have investors at all. This is where money is simply given without donors receiving compensation in return.

Crowdfunding has become increasingly popular over the years and has been taken seriously as a startup funding option. This means that the attention of government consumer protection burgess is focused on these crowdfunding platforms. You can get shut down and even fined if you are caught creating a deceptive crowdfunding campaign so be sure that you know the rules and play them correctly so that you do not find yourself in trouble legally while trying to get your business started.

Do Not Just Post a Campaign

It takes work to have your crowdfunding be successful. You cannot just set it up and leave it there. It is just as much as a sales campaign as any other traditional advertising that you do. You are just selling your brand and your product to investors rather consumers.

Make sure you have a clear and compelling story. You need to have the right presentation materials in order to sell your concept. It is recommended that you create some form of video. Video has been proven to convert better than just plain images and texts.

Both during the actual campaign and during your pre-campaign it is essential that you gain a large following as possible. Use every tool you have at your disposal including social media or guest blogging to gain followers and potential investors.

Be Transparent

When you launch a crowdfunding campaign, you are asking someone to believe in you and they express that by giving you money. This is why it is important that you are upfront and transparent with your business to possible funders. They want to understand where you are in the process and what your next steps are. Also make updates to your investors a priority especially for rewards-based crowdfunding. Unlike debt or equity crowdfunding, you are dealing with inexperienced investors.

Do Not Expect to Get the Funds at Once

Crowdfunding is not a quick way to get the funding, it takes a lot of work and time to get the funds you need for your business. The idea that you will raise all of the money you need for your business is false. With crowdfunding you need to take in enough money to get through a state of your growth which might be the initial startup or a launch of a new product. You can run several campaigns over the years if you need to raise more funds. Experts suggest that a series of fundraising campaigns are most effective if they are 30 to 45 days.

Select the Right Crowdfunding Platform

Look into the several crowdfunding platforms available instead of just picking the one that you are most familiar with. Each crowdfunding platform is set to serve a different purpose and audience so choose the one that fits best with your business type and goal.

The following are some ideas of crowdfunding platforms:

  • Kickstarter – great for tech and creative entrepreneurs
  • GoFundMe – great for personal fundraising
  • Indiegogo – best for tech startups and community projects
  • Patreon – great for designers and creators
  • LendingClub – a go-to for business loans

Do Not Forget to Pay Taxes on the Funds You Raise

Rewards-based campaigns that bring in money is viewed by the IRS as taxable business income. It is advised that businesses consult with their tax advisors before beginning any crowdfunding campaign so that you know you are covered before you begin.

Consult with an Attorney

There are some serious consequences for business owners who fail to adequately protect themselves when using crowdfunding. Before launching a crowdfunding initiative, consult with an attorney and make sure you are being compliant and that your business structure will protect you from personal liability.

Do Not Neglect the Costs

There is a misconception that crowdfunding is more cost-efficient than other types of funding. There are fees for using the services and the cost of complying with SEC regulations add up. It depends on the type of portal you are using so be sure to be aware of what those are. Equity crowdfunding requires you to give investors a part of your business too, which is a cost that you would not have if you went with traditional debt financing.

Get Insurance

Many startups and new business owners do not want to suffer the expense of liability insurance before they know that the product, project, or company will have an actual life. Or they think the risk of liability form the product will be minimal.

Many new business owners fail to recognize that the primary benefit of liability insurance is not necessarily the insurance company paying a liability judgment. The greatest benefit is the insurance company paying for a legal defense against a liability claim.

The Bottom Line

Crowdfunding is a great way for entrepreneurs to get their business launched quickly without relying on a bank or a single lender. Just like with anything though, it comes with its own risks and hurdles. Be sure to do your research beforehand and consult with experts who have been through the crowdfunding process.