Crowdfunding is becoming an extremely popular way for small businesses to fund new projects and increase productivity, and the trend is experiencing staggering growth. In fact, the crowdfunding economy has more than tripled in the last three years, from $1.5 billion to $5.1 billion.
If you haven’t yet heard all the chatter about crowdfunding, here is the gist of it. Let’s say the owner of a local retail business wants to launch a new product line, but he needs a loan of some sort to cover the initial production costs. Rather than going to an investor — who will claim a pretty large stake in the business — the shop owner turns to one of the many crowdfunding sites out there to raise funds for the new venture. Anyone who is interested in being part of growing the business donates funds with minimal risk because there are multiple — hundreds even — of backers supporting the project. With those funds, the investors purchase a share in the company. Should the company take off, investors stand to make a nice return on their investments.
With small business loans not easy to come by and investors weary of backing startups, crowdfunding can be a great way to bring a product to market. So how do you know if crowdfunding is right for you? Consider the following:
Commitment to the Project
Best case scenario is that you gain enough funding to move forward with your project. However, you will have many people invested in the idea, and if you fail, you will disappoint them all. Know for certain that you are 100 percent ready to move forward with your planning — and do everything it takes to succeed — if the money comes through.
Understanding of the Laws
The JOBS Act sets parameters on what small businesses can do when it comes to crowdfunding. For example, the JOBS Act will require entrepreneurs to follow SEC-compliant guidelines when it comes to financial reports. Do your research and know what your legal restrictions and requirements are before you move forward with any crowdfunding plans.
If you don’t have a business plan, write one. A well-done business plan is absolutely critical to getting investors to believe in and support your idea; it shows that you are serious about your small business and that your venture is valid. Plus, you will need to be prepared to answer many questions about your idea, plan and business. If you have drafted a thorough business plan, you literally will have those answers at your fingertips.
Ability to Get More Traditional Funding
Have you put a business plan together and presented it to the bank or an investor? If you’ve been turned down by both and don’t have other options, crowdfunding could be the solution for you.
Willingness to Put the Pressure On
You are going to have to be ruthless in your marketing approach. Are you ready to hit up everyone — friends, family, neighbors, business contacts, the person in front of you at the grocery store — for months until you raise enough funds to support your project? Be ready to pitch and promote every day until you meet your goal.
It has to be perfect because you are trying to influence a whole lot of people — many of whom are strangers — to invest in your idea. If you don’t have a solid pitch that is going to resonate with investors, hit the drawing board and plan something that will before you set up your crowdfunding account.
The Amount You Need
Under the JOBS Act, you can’t raise more than $1,000,000 in a year from crowd-funding efforts. In addition, in most cases you have to raise the minimum amount you request, so if you are trying to raise $50,000 for your small business and you raise only $49,000, you don’t get a dime. If you go over your requested amount, you keep everything. Use your business plan to figure out exactly how much money you need to move forward with your idea. Don’t get greedy and inflate the amount or you risk not getting anything.
If, after taking all that in, you feel ready to move forward with crowdfunding, The Small Business Association offers the Introduction to Crowdfunding for Entrepreneurs to guide you. Crowdfunding is a low-risk way to raise capital for starting your business, expanding your product line, moving into new markets and more. If you have been turned down by banks and other investors, it may be your only choice. Just be sure to do your legwork, commit to the process and follow through to drastically increase your chances of hitting your financial goal.