Crowdfunding is an option for raising money for financing a project or business. It enables the fundraiser to receive money from many people by use of an online platform. Instead of the more common process of getting big amounts of money from a few people, crowdfunding asks thousands and millions of people for small amounts of money, and does so over the internet. Crowdfunding gives entrepreneurs access to a wide audience of potential investors, rather than trying to find a few big investors. It also frees the entrepreneur from the hassle of raising funds on his or her own, and leaves time for concentration on building the business.
A crowdfunding campaign begins when a fundraiser presents a fundraising proposal to a target group on an online platform. In return, members of the group who accept the offer make and deposit a financial pledge which is kept in escrow with the managers of the platform, for a fee. A Small Business Owner wishing to crowdfund a start-up or going concern would consider various options, depending on the nature of the project or business.
In peer to peer lending, the crowd will put money in a project or business as a loan to be re-paid with interest. In such a case, instead of getting a loan from one source, like a bank, the credit is advanced by a by a group of lenders.
There is also the option of equity crowdfunding whereby the business owner gets money from a large pool of people in exchange for interests in the business; like it happens on a stock exchange transaction, albeit on a small scale.
Under a reward-based crowdfunding, groups of individuals make contributions to a project or business and, in compensation, they receive non-financial rewards like goods or services, in proportion to the contribution that each one makes.
Crowdfunding can also be based on profit or revenue sharing. In such cases, businesses can get funding from crowds with the promise of sharing revenues or profits that accrue from the business.
What are the key benefits of crowdfunding Small and Medium Enterprises? The usual sources of patient capital include dipping into personal saving, borrowing from family and friends, securing bank loans, applying for government grants, and pitching to angel investors and venture capitalists. Crowdfunding has the advantage of achieving a quicker launch of the business idea, by bypassing those sources, many of which are time-consuming and expensive, difficult to close, and may only be obtained with stringent conditions or high price tags.
The crowdfunding process can also produce insight for the promoters of the business or project, which can help to refine the idea and improve its market entry strategies. This could happen through feedback in the course of interaction with prospective investors during the crowdfunding exercise, which could help to validate the proposal on offer and facilitate buy-in for the vision of the business.
Furthermore, crowdfunding as an alternative source of equity and debt finance is much cheaper than traditional sources. The business owner does not need to make an upfront payment or pay a set-up fee. The crowdfunding platform charges a small percentage of the fund raised; on the basis of no success, no fee.
Another advantage of crowdfunding is that the entrepreneur is able to structure the ownership of the business in a way that helps him or her to retain a majority control of the business. This is possible because of the large number of contributors involved, with each holding a small stake in the business; unlike when the funding is raised from a few people who, individually, make significant contributions to the funding of the business.
Crowdfunding clearly offers a business or project a way to market itself through a digital campaign to potential investors with a view to getting them to become investors. It is a viable option for the Small Business Owner seeking funds to start or grow a business or embark on a project. For an investor, crowdfunding provides an opportunity to have a stake, at minimal risk, in a diverse portfolio of multiple businesses. However, despite its growing popularity as a new source of investable funds, there is still an absence of enabling policies to guide the practice.
- Are you considering crowdfunding for your start-up or new project? Let’s explore your funding options at https://smefinance.org/thesmelab.
- Would you like to chat with aspiring and practising Small Business Owners about funding your business? Join THE SME GROUP, our official Facebook page, at https://www.facebook.com/groups/smefinance/