Small business crowdfunding is different from other types of crowdfunding we cover here because this type of financing is usually used for ongoing operations and product or service development for an established, even if small, business. It is different from equity crowdfunding because no equity stake is given up, and it is not start-up crowdfunding because the small business is already established. Crowdfunding for small business is similar to peer-to-peer lending in that the crowd funds a specific need, and payback occurs over time. What distinguishes small business crowdfunding is that it is done through a clear pitch for a particular purpose marketed to the crowd, whereas peer-to-peer lending may be more general.
Why do we separate small business crowdfunding from the same funding that larger, more established businesses may go for? First, small businesses often need funding more quickly and urgently as their initial funds are used up or, in a related way, because they find themselves growing more rapidly than anticipated. Second, investors may be drawn to small businesses with the potential to help them grow and boost the rollout of a new product or service to the market. And finally, the relationship between small businesses and investors may feel closer and more personal, which makes it ripe for crowdsourcing.
Small Business Crowdfunding: Uses
Small business crowdfunding encompasses many forms of investing that interested parties can provide a business venture. Some of the ways small business crowdfunding can be used include:
- To develop a new service that will scale what is already being done. In this way, the established small business can expand into new services without using what may be small profits or money that needs to be used for other operating purposes. Funding a new service can feel almost like a start-up to the investor – but the investor also has the security of knowing that the business has the experience and infrastructure to be successful.
- For expansion into a new geography or development into a bigger footprint. This may also feel like funding a start-up; in some cases, the investors may have a stake in expanding the geography. They get the opportunity to be part of something new but know and like the product or service involved.
- To develop a new product or expand a product line. Like when a new service is being rolled out, this option allows the business to conserve its capital and the investor to know that the company is already established.
- To hire new positions such as an expanded sales force. This may not be as exciting as some options, but it holds tremendous potential if new staff are needed because the products or services the business offers are popular.
- To modify a product or service. The investors may feel that with a bit of modification, the product or service will take off, and thus this form of crowdfunding for small businesses can be quite popular.
- To update equipment, including software. Another slightly less exciting possibility, for of crowdfunding for business can be attractive because it also may have to do with a product or service being so successful that new infrastructure is needed
Crowdfunding for Small Business Pitches.
Small business crowdfunding involves pitching through a website promoting these requests. It may merely involve investors getting payback with interest, or there can be perks that the investors get related to that business. Often the investors get an inside first look at the changes or improvements they are helping pay for. In the case of small charities and other nonprofits, the payback may be less, and some of the investment may be a charitable donation.
Small Business Crowdfunding from Employees or Friends
There is sometimes a specific reason why a small business chooses crowdfunding, and that has to do with the crowdfunding site being the middleman between people who already know each other and want someone to manage the transaction. For example, when friends or family are going to help fund a business venture, they may want to have someone else handle the money and provide the structure behind the investment. Crowdfunding websites and platforms can be a great fit in these instances.
Small businesses might do internal crowdfunding campaigns where employees and other stakeholders become the investors. In these cases, like the above, the company and its investors may want a crowdfunding platform or website external to both groups handling the transaction and ensuring that all parties get what they seek. This kind of internal crowdfunding is popular with start-ups and small businesses where the company wants to give employees a stake and the motivation to help the company succeed.
Combined Crowdfunding for Small Business
Of course, sometimes, these crowdsourcing funding campaigns can all be combined – a general external funding campaign, an internal funding campaign, and a more specific targeted crowdfunding campaign to existing stakeholders. The perks and rewards of each type may differ. For example, employees may already have access to the latest news and latest prototypes. They, therefore, may want other rewards like free training, enhanced benefits packages, or even gift certificates and the like.
Mixed Small Business Crowdfunding
While crowdfunding for small business often differs from equity crowdsourcing, there can be a mix in the payback agreement, where the investors receive some degree of equity, maybe only in the new product, service, or geography. And while we differentiate this type of crowdsourcing from start-up crowdfunding, there can be the same feel. As time passes, more investors will realize that despite the excitement and perhaps greater reward that can come with equity agreement, this type of investing can have less risk and an excellent reward profile. A lot more about the company, its management, and the quality of its products or services can be known with small business crowdfunding.
We can help! If you are looking into small business crowdfunding for your company, we can help you find the best platform for your needs, help design the pitch, and continue to help you attract and retain investors. Contact us to learn more about our crowdfunding for small businness services.
