Should Your Business Consider Crowdfunding?

Thu, Aug 2, 2012


Let’s just start by agreeing that when it comes to business you should be willing to consider all options that have the potential to improve your operations, save you money, or otherwise benefit your professional enterprise in some way. You wouldn’t go to only one bank in search of a loan; you’d compare several options to find the best terms. And you’d never accept a vendor without first determining whether or not you could get better prices and service elsewhere. You probably even check prices and options when you order office supplies or bring in coffee and doughnuts for employees on Friday morning. The point is, when it comes to crowdfunding you should definitely consider it as a possibility for obtaining the funds needed to launch or sustain your business. But you’ll certainly want to do your homework before jumping into the crowdfunding experience head-first.

As with any type of funding, you need to consider the pros and cons of this potential avenue for financial support. A good place to start is by comparing it to more traditional means of gaining a temporary windfall for your company. For example, the majority of business entities start out with loans, and for the most part they are a fairly straightforward form of lending. You borrow a certain amount of money at a certain interest rate and agree to pay it back in installments over a set amount of time. Then there are investors and partners, who generally offer money in exchange for some amount of say in how the business is run. But crowdfunding is a different beast altogether.

It basically operates on the principle that many small investors can pack the same financial punch as one or two heavy-hitters. So businesses that participate in crowdfunding usually turn to the internet as a means of reaching the vast audience needed to fund their startup or sustain operations through an expansion phase, for example. In truth, most businesses opt to use crowdfunding services that already have a built-in user base (rather than striking out on their own). If the product or service the company is offering appeals to a large number of potential investors (usually individual consumers), then they can offer their support by letting their consumer dollars speak.

What’s unusual about this type of funding is that it doesn’t always require repayment of funds. Those who opt to use crowdfunding will generally offer products or other extras in lieu of paying back the money “donated” to their business. They may offer several tiers of donation, from $20 to a couple thousand bucks (or more), with each level bringing different rewards for the “investor”. Most will offer to send out a product to low-level investors before it hits store shelves, while those that give more may get specialty products or even a trip to the business to meet the founders. It all depends on the company and how much money they need. If you want to learn more about this form of obtaining funds for your business you should definitely visit a finance or related blog. But the truth is that it costs you nothing to at least consider crowdfunding, so there’s really no reason not to put it on your list for potential investment funds.

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