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Crowdfunding has quickly become one of the most popular, and high profile ways, companies can seek new capital. Whether it’s launching the latest product or financing business growth crowdfunding has the potential to deliver the capital a company needs. However, the question is whether raising capital in this way is actually beneficial for your company.

Understanding the Types of Crowdfunding

There are three types of crowdfunding methods a small business can use.

Rewards Based Crowdfunding

This is the most popular crowdfunding method. It has been made popular by Kickstarter and IndieGoGo and attracts a lot of media attention.

With this capital raising method you offer a variety of rewards to your backers for their support. This usually involves pre-sales of the product you wish to launch – with a variety of potential rewards for various cost donations – from inclusion in the project to a simple thank you.

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 Who is this suitable for?

Rewards based crowdfunding is most suitable for companies looking to launch new products or services and test the potential market. It is not suitable for companies looking to raise capital for expansion for companies without a product prototype ready to develop and launch.

 Equity Crowdfunding

Equity crowdfunding lets you raise capital in exchange for a share of your company. Compared to venture capital the majority of companies raising capital cede less than 15% of their company compared to 40% with angel investors.

On crowdfunding platforms you dictate the percentage of your company you are prepared to give for the capital you need.

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Who is this suitable for?

This type of crowdfunding is most suitable for growth stage companies with an existing, profitable business. A strong trading history, growth history and clear expansion plans make it a lot easier to attract crowdfunded capital.

Loan Crowdfunding

Loan crowdfunding allows you to borrow capital for any business purpose. You can dictate the interest rates you are prepared to pay and the loan repayment term. Loan crowdfunding enables your business to borrow money at a much lower rate than the banks.

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Who is this suitable for?

Loan crowdfunding is most suitable for businesses who have clear business needs – whether new equipment, personnel or business expansion. It is most suitable for companies who already have a strong trading history and ideally assets to underwrite the loan.

Is crowdfunding better than venture capital?

The main advantage of crowdfunding is that you can gain funding from a wide variety of investors and dictate your own terms to acquire the capital.

Venture capital and traditional angel investors will tend to have their own terms they dictate and will, in most cases, take a larger percentage of your company.

In a similar way crowdfunding allows you to receive a much better interest rate on money borrowed – particularly when compared to banks.

However, one core difference is that many angel investors will bring their own expertise and experience to your business. They often have high profile connections and extensive experience which can help you grow your business more efficiently and effectively.

The question of whether crowdfunding is right for your business really depends on where your business currently is and what it needs to achieve. If you have an established business looking to grow then crowdfunding offers a much cheaper alternative to other capital acquisition techniques. If you are a start up looking to grow rapidly you may be better off seeking the business support of a venture capital company.

The good news is that many venture investment firms now use crowdfunding platforms – so you can still source from the crowd whilst dictating your own terms – to an extent.

For more advice on crowdfunding, check out crowd funding resource websites like http://crowdfundingwebsites.co.uk. This one is a resource site for both the investor and investee, where you can find advise on how to start your own campaign and the latest industry news.

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