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Accounting & Finance

What small businesses need to know about crowdfunding

Posted by Kanika Sinha

May 2, 2016

So, you’re interested in crowdfunding? It seems like everyone is these days. Yet, we find that many companies don’t have a solid understanding of how to best use it.

In this article we look at what small businesses need to know about crowdfunding. First, let’s define it.

What is crowdfunding?



It is the way businesses go about raising capital through the collective effort of friends, family, customers and individual investors.

Crowdfunding is what it sounds like. It’s the collective efforts of large groups of people primarily online through crowdfunding platforms and social media to raise money for small businesses.

Typically, if a small business wanted to raise capital, they’d write a business plan, do some market research and perhaps even build prototypes. Then, they’d start shopping for investors from a pool of banks, angel investors, venture capitalists and the wealthy.

This traditional method of raising capital is time consuming and tricky. You've got to approach an investor at the exact right time with the right pitch.

Crowdfunding comes at raising capital a bit differently. You have total control through whatever platform you choose to pitch and showcase your business.

You’ll spend much less time crowdfunding because it’s so much easier for you to get your business in front of a healthy Internet audience.

You also make it much easier for more people to donate smaller amounts instead of one or two people donating the whole pot.

Here’s what you should know about crowdfunding.

Anyone can invest



When you crowdfund, you don’t have to turn to banks or investors to raise money. There are no shareholder limits, and you can crowdfund from anyone.

Watch the rules



If you are looking to raise under 20 million over a year period, the rules aren’t so strict.

You can advertise with little or no restrictions, but your financial statement must be reviewed by an accountant.

Individual investors can self-certify their income without providing documentation. Plus, the SEC and states perform a coordinated review of your filing – this means you don’t have to file paperwork in each state.

If you’re looking to raise more than $20 million, look into the regulations because they are stiffer.

The door is wide-open



The best part of crowdfunding is not having to go to the bank and borrow money. You can now raise capital for your business, and give up a little equity, with less fees.

Spend time with your campaign



Allocate some time to spend on your crowdfunding strategy. Use your website and social media to build buzz about your crowdfunding campaign.

Consider hiring some marketing pros to help you launch your campaign with custom graphics, videos and other marketing tools.

The better you present your campaign, the better your shot at success.

Crowdfunding is not a set it and forget it undertaking. Allocate time for the pre-campaign as well as the campaign itself and the post campaign.

Plan on your campaign running a bit over a month, with the most successful campaigns running between 30-39 days.

Always keep your campaign page updated, and consider adding fresh content throughout the campaign period. Don’t forget to offer incentives to potential funders.

Create a social media and email marketing plan.

Create a posting strategy to keep your social media followers up to date on an ongoing basis.

Send out emails to potential funders, and then continue to send out emails to your donors and contributors. Maintain interest and build momentum throughout the campaign, and you’ll watch the dollars grow.

Final thoughts



First, you’ll find numerous websites online dedicated to crowdfunding. Some of them are specific to certain fields. Do your research and find the site that works best for your needs. Remember to look at your audience – if the site doesn’t fit your market, it’s not a good fit.

Second, always read the fine print.

Make sure you know exactly what you are signing up for. Most sites will charge you a percentage of the funds you raise. And, if you don’t raise the whole amount of your preset goal, you might not see any money.

What’s more, some sites charge you a fee if your campaign wasn’t successful.

Understand whether or not you’re soliciting donation or equity-based funding. Contact your financial advisor before stepping into the crowdfunding arena so you are fully informed of the risks involved.

Are you a new startup? Are you looking to get your new business off the ground and watch it rise to success? We are here for you. We can help answer your questions and guide you through the process. Outsource your finances, payroll, HR duties and more to us. Contact Escalon today to get started.

Authors

Kanika Sinha
Kanika Sinha

Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.

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