Traditional methods such as bank loans, bank overdrafts, loans from friends, acquiring angel investors and using credit cards have proved to be inefficient for most new businesses in the past. Fortunately, crowdfunding is a rather new and great way to bypass these traditional methods. Below, we take a closer look at what crowdfunding is and how it could be beneficial for your business.
What is Crowdfunding?
In itself, crowdfunding refers to the use of the internet and various social media platforms in order to raise capital for a business or a business idea. In general, hundreds, if not thousands of people, pool money into what they believe may be a great venture. Moreover, due to recent advances in technology, both in terms of application and availability, crowdfunding is rapidly gaining momentum.
How does it help my Business?
So how exactly does crowdfunding help any business? Here is a look at some of the most distinct advantages that crowdfunding presents to businesses.
One of the biggest benefits of raising money through crowdfunding is that entrepreneurs have little to no risk. For example, Mr. Smith would like to open a fast food restaurant. However, he does not have sufficient capital. Unfortunately, due to the competition in the market, her fears he may fail and will be unable to repay the borrowed capital. As such, he decided to use crowdfunding as a source of capital. For those who invest, he promises to repay their money within 2 years along with discounts and free merchandise.
In the likely event that the business fails, he does not have to pay the money back. However, people do expect him to live up to the promises he made when they were funding. As such, he will still have to provide the free merchandise and discounts, even if it is to another store
Mr. Barbman would like to launch a small custom t-shirt business. He realizes that it doesn’t require much capital but, he still doesn’t have the amount for it. As such, he resorts to crowdfunding, promising each donor equity in the company. Evidently, he did not go to the bank.
Crowdfunding ensures businesses do not have to resort to burdensome and taxing loans to launch a small company and most recently, it can be facilitated through online crowdfunding platforms such as Kickstarter.com. In Ireland, local Crowdfunding platforms such as Linkedfinance.com and Ifund.ie have gained momentum and are competing with the larger players in the global market such as Kickstarter. Crowdfunding can also gain such valuable PR for your business.
In Israel, crowdfunding has proved to be an enormous success. Equity crowd-funding platform for accredited investors, OurCrowd recently announced that it has raised over $20 million for its 26 portfolio companies.
Is Crowdfunding Right for every Business?
One of the most important questions asked pertains to whether crowdfunding is right for your business. The one downside to crowdfunding is that you don’t always have access to a large amount of capital. In this example, let’s take a look at Ms. Wayne, a lively entrepreneur who wishes to launch a crockery store.
In itself, crockery is very expensive and thus Ms. Wayne requires a sufficiently large amount of capital. As such, she turns to crowdfunding to generate the capital. Considering that most people usually donate small amounts, the capital generated is large. However, the capital generated is not large enough for her business. As such, she has to obtain a loan from the bank to start the business.
Whether crowdfunding is right for your business is a choice that business owners and founders must make. They need to outweigh the pros and cons and finally decide whether it will generate a large amount of capital or not enough. Irrespective of the amount of capital generated, done right, crowdfunding can be an effective method of capital generation, possibly enough to propel your business to the next level.