Types of Crowdfunding and How to Choose the Right One for Your Business
So you could use a little cash injection for your small business, but you’re not sure you can get a traditional small business loan. Short of winning the lottery (or draining your personal savings), what options do you have for funding? Crowdfunding may be for you.
If you’re not familiar with the concept, crowdfunding essentially allows you to fund your business through a variety of people who want to be a part of what you’re doing. Depending on the type of crowdfunding you choose, you may need to repay a loan or provide some sort of incentive to those who invest in your campaign.
Let’s walk through the four types of crowdfunding and look at the benefits and drawbacks to each.
First, a general look at crowdfunding
Before we dive deeper, let me explain why crowdfunding is so important to small businesses and startups right now.
In the United States alone, $74 billion was raised in 2020 and the average funding per campaign is $8,000. Funds raised through crowdfunding grew by one-third in 2023 over the previous year. The crowdfunding market is also expected to grow to $300 billion in 2030.
Clearly, crowdfunding has become a worthy contender to more traditional forms of business financing.
Four types to consider
If you’re sold on the idea of raising funds this way, realize that you have a few options. Surely, one will speak to you louder than the others.
1. Debt crowdfunding
Just like a traditional business loan, debt crowdfunding involves raising money that you pay back. The most well-known example is Kiva. While Kiva is known for its focus on helping entrepreneurs in developing countries, it is also available to American-based business owners.
A benefit of platforms like Kiva is they usually don’t look at the same factors to qualify a borrower that a traditional bank will. They care less about your credit history than they do what industry you’re in, how long you’ve been in business, and the level of risk you present to lenders. The larger the loan you want to take out, the more qualifications you’ll need to meet.
2. Equity crowdfunding
Another option when it comes to crowdfunding involves giving investors equity in your business. Yes, it’s a little like seeking angel investment or venture capital, though a bit easier if you’re willing to put in the marketing effort to spread the word about your campaign.
Wefunder is a great example of equity crowdfunding. The site is open to pretty much every type of business, from the corner cafe to the biotech company exploring the benefits of glowing plants. There are different options for the equity someone will get in exchange for her investment, but stocks (with and without dividends) and convertible notes are an option.
The benefit here is you set the terms about how much equity you’re willing to give up. And you don’t have to pay back a loan. If there’s a drawback, it’s that relatively few people know about equity crowdfunding as opposed to the other types, since it’s still pretty new. You may find it easier to attract investors through the other crowdfunding options.
3. Reward-based crowdfunding
The next type of crowdfunding is interesting because, rather than paying back funds raised or inviting others to share a stake in the company, you’re rewarding backers with incentives. That might be as simple as sending a thank-you card for a small donation. It could also involve giving early access to your product or flying out a top contributor for a VIP day with your company.
You’ve probably heard of Kickstarter: 10 million people have funded projects there (maybe you’re one of them). Whether you are looking for funding to help launch your video game, publish your book on feminism, release your eco-friendly shoes, or something else entirely, anyone who finds your campaign compelling can contribute.
The benefits of reward-based crowdfunding are you don’t have to pay back a loan, and your backers who will have exclusive access to your product should be pretty excited to spread the word about it. The drawback is you’ll have a lot of pressure to raise funds quickly, and it can become dispiriting to get lots of $5 or $10 contributions when you really want the big bucks.
4. Donor crowdfunding
The final option to consider is donor crowdfunding. With this type, you aren’t required to pay back the funds nor provide any rewards to donors. GoFundMe is a well-known donation-based crowdfunding tool.
The appeal is obviously not having to pay back funds, so you can put the money to work for your business. If there is any drawback, it may be that sites like GoFundMe are primarily known for raising money for personal reasons. Therefore, donors may not be in the mindset of supporting businesses through these channels.
What you need to know
Whichever type of crowdfunding you decide is best for your business, know one thing: the success of the campaign will rely entirely on the marketing power you put behind it. Investors and donors love a good story. You’ll need to tell that story through your content on the project page, a video, and outreach through social media, your blog, email, and every other avenue possible.
This is probably the most overlooked component of crowdfunding for businesses. Some entrepreneurs think it’s easy money—they post a project and then are baffled when the dough doesn’t roll in. But just like anything you want to sell, you have to market it. You have to convince people to part with their money (with no guarantee they’ll get it back in repayment or rewards). You have to entice them to think your business is worth helping. Some business owners hire crowdfunding marketing experts to ensure their campaign's success.
But if you do put the effort into spreading the word about your campaign, crowdfunding can be an excellent resource, whether you’re launching a new product, looking to expand operations, or just trying to take the pulse of your audience.
RELATED: These 5 Startups Ran Wildly Successful Kickstarter Campaigns—Here’s What You Can Learn from Them
