As a business owner, you are likely familiar with traditional methods of raising capital such as seeking help from business angel investors or venture capitalists. However, business owners also have the opportunity to raise funds via crowdfunding. So, what is crowdfunding?

What is crowdfunding?

Crowdfunding is a method of raising capital through customers, family, friends, and investors on crowdfunding sites or platforms. Throughout the crowdfunding process, a business owner may use a number of platforms and crowdfunding sites to help raise capital.

Crowdfunding is transforming financial strategies for many businesses and organizations. One source predicts crowdfunding will become a $300 billion industry by the year 2025.

You may be wondering who uses crowdfunding. Some types of organizations and businesses that utilize crowdfunding include:

• Entrepreneurial ventures or startups
• Struggling businesses
• Nonprofits
• Not-for-profit organizations
• Charities
• Churches
• Individuals raising money for others (e.g., medical expenses)
• Organizations looking to fund expenses for animals (e.g., vet bills)
• Communities raising capital for projects

Crowdfunding platforms

Traditionally, entrepreneurs spend a lot of time and money pitching a small business plan, vetting potential investors (e.g., venture capitalist), and raising funds to grow their businesses. Crowdfunding options allow startups and organizations to streamline their capital raising efforts online.

Entrepreneurs can use a platform to build, showcase, and share their pitches. And, they have the opportunity to present their business plan to a large pool of investors.

Types of crowdfunding platforms include GoFundMe, Kickstarter, and Patreon. Some crowdfunding websites may be in place to fund specific groups or industries, such as musicians. Others may allow a variety of causes, ranging from startups and small businesses to nonprofits and individual fundraising.

Typically, crowdfunding platforms charge fees to promote campaigns. You can usually sign up for free. However, businesses wanting to fundraise might have to pay anywhere from 5% to 8% of earnings in fundraiser fees. And, some websites tack on processing fees, too.

Research crowdfunding platforms to see which site is the most cost-efficient for your startup or organization.

Types of crowdfunding

There are four main types of crowdfunding, including donation, reward, equity, and debt crowdfunding options. Review each type of campaign below.

Donation crowdfunding

Donation crowdfunding is a type of campaign where there is no financial return to investors or contributors. Individuals give donations to fund a specific idea or cause.

Common donation-based crowdfunding initiatives include raising money for charities, nonprofits, or disaster relief efforts.

For example, a company might give charitable business donations to help raise money.

Reward crowdfunding

Reward crowdfunding involves individuals contributing to a business in exchange for a type of reward or incentive. Usually, the reward consists of something relating to the product or service your business offers.

Reward-based crowdfunding works best for companies offering goods and other tangible products. And, it can be beneficial to startups looking for a test market for their product or service.

Equity crowdfunding

Equity crowdfunding offers individuals real investments in private companies. Contributors can become part-owners of your business by trading capital for equity shares. Essentially, equity crowdfunding allows you to sell off a piece of ownership to a contributor.

Your contributors receive a financial return on investment and share of profits in the form of a distribution or dividend.

Equity-based crowdfunding campaigns are popular with entrepreneurs and startups looking for an alternative to venture capital efforts.

Debt crowdfunding

In debt-based crowdfunding, the individual running the campaign borrows money from contributors. Individuals agree to lend money to a company. In return, businesses agree to repay lenders.

Typically, business owners set time frames for how long it will take to pay back contributors and include interest rates when repaying them.

Entrepreneurs who don’t want to give up equity in their company might seek help from debt crowdfunding instead.

Benefits of crowdfunding

Crowdfunding offers a wide range of benefits, including flexibility and helping to tap into a wider investor pool.

Some additional advantages of crowdfunding for business include marketing your business, accessing many potential investors, and having a more efficient way to fundraise.

Be sure to weigh the pros and cons of crowdfunding before deciding to implement it for your small business or organization.

Do you need a simple way to track your crowdfunding transactions? Patriot’s online accounting software lets you easily record income and expenses. Try it for free today!

This article has been updated from its original publication date of July 16, 2013.

This is not intended as legal advice; for more information, please click here.