What is Crowdfunding for Small Business?

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This is a guest blog post by Erin El Issa, a Content Writer for NerdWallet.  NerdWallet is focused on helping people lead better lives through financial education and empowerment. NerdWallet has featured MBDA on a recent Google Hangout and is engaged in sharing resources with the MBDA network.  A series of shared blogs will feature content provided by NerdWallet staff as part of MBDA’s continued support for Small Business Week 2015.

In recent years, crowdfunding has become a popular way to fund small business endeavors for those who aren’t independently wealthy. But how does it work? Here’s what you need to know about crowdfunding and how to get started if you want to start or fund a project.

What is crowdfunding?

Crowdfunding is the raising of money by multiple people for a project, usually a good, service, experience or cause. Essentially, a large group of people who don’t necessarily know the project initiator can fund this person’s business or project through a third-party crowdfunding organization. This allows the initiator to start their dream business, publish a book or even make potato salad.

What is the contributors’ incentive to help a crowdfunding project?

The benefits to the project initiator are obvious, but what do the donors get out of this? This depends on the type of crowdfunding. Popular types include:

  • Rewards-based crowdfunding: In rewards-based crowdfunding, the donors will get a product or service related to the project. The value this product or service holds will depend on the amount donated. For instance, a $5 donation might get you a handwritten thank you card for helping to fund the project, while $50 or $100 might get you the product that will be made by the business venture being funded. Either way, the money donated is enough to cover the cost of the good or service, plus help pay for the project itself.

  • Equity-based crowdfunding: For equity-based crowdfunding, donors will receive shares in the company; the number is based on the amount of the contribution. Contributors choose to invest in companies they believe will be successful in the future, as the success of the company directly influences the return on investment donors will get from equity-based crowdfunding.

  • Credit-based crowdfunding: You may have heard of credit-based crowdfunding on a personal, not business, level. It’s often called “peer-to-peer lending” and is essentially a loan at a reasonable rate funded by multiple investors. Rates will depend on the credit history of the person applying for the loan, but those with good credit can often get a better interest rate on a peer-to-peer loan than on a traditional bank loan. That said, investors can usually make a better return on investment than playing it safe in a mutual fund or bond.

Of course, there may be a touch of goodwill, but there are definitely quantifiable reasons for investors or lenders to participate in crowdfunding projects.

Should I use crowdfunding?

There are a few things you should consider before you try to start a crowdfunding project. These include:

  • Your project: Ask yourself: Why would anyone care about this project? Does it provide a good or service that would make people’s lives easier? Is it a cause close to the heart of many people? Whatever your project is, it’s unlikely to be funded unless other people believe it’s a project that matters. And while a potato salad did receive contributions in the high five figures, this isn’t the norm.

  • Your project plan: Will the amount you’re asking for cover the expense of your project? Do you have a detailed plan on how to bring your project to fruition? Do you have a dedicated team to get your project up and running? You need to be a doer in addition to a dreamer, so make sure your project plan is realistic.

  • Your video: This is arguably the best part of your project profile. You need to create a short video telling potential contributors your story. Explain the good or service, how it works and why it matters. If you don’t have a person in your circle with mad videographer skills, you’ll need to hire someone. This isn’t the place to skimp — people are unlikely to contribute to a project with a shaky iPhone video.

  • Your network: Even an awesome project won’t get funded if no one knows about it. And while people may come across it while browsing their favorite crowdfunding site, it helps to have a large network to spread the word. If you decide to crowdfund, shyness needs to go out the window. Tell everyone in your life about it and ask them to spread the word on social media and offline. Funding your project will be much easier if you have a project others care about and a ton of people promoting it on your behalf. Get ready to turn emailing people about your project into a full-time job.

  • Your marketing plan: If your project is a winner, start local. Call television networks and reporters in your area a few weeks before your launch to see if they’re interested in featuring your project in a story. Post on social media channels, back similar crowdfunding projects for exposure, engage with the crowdfunding organization’s community, etc.

  • Your rewards: Are the rewards you’re offering appealing to your target audience? Whether it’s a good or service or shares in your business venture, if they aren’t appealing enough to your audience, people won’t contribute.

Bottom line: Crowdfunding is a great way to get your project off the ground, as long as it’s a project people care about and it’s marketable. Check out the available platforms above to choose a crowdfunding organization that’s right for you and put together your business plan. Good luck!

Originally posted on NerdWallet.

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