4 Types of Crowdfunding: Which One Is Right for Your Business?

Crowdfunding concept

So you could use a little cash injection for your small business, but you’re not sure you can get a traditional small business loan. Short of winning the lottery (or draining your personal savings), what options do you have for funding? Crowdfunding may be for you.

If you’re not familiar with the concept, crowdfunding essentially allows you to fund your business through a variety of people who want to be a part of what you’re doing. Depending on the type of crowdfunding you choose, you may need to repay a loan or provide some sort of incentive to those who invest in your campaign. 

Let’s walk through the four types of crowdfunding and look at the benefits and drawbacks to each.

First, a general look at crowdfunding

Before we dive deeper, let me explain why crowdfunding is so important to small businesses and startups right now.

It’s expected that, by 2025, the crowdfunding market will be worth $300 billion. In the United States alone, $17.2 billion was raised in 2017. This equaled about half of the volume of crowdfunding around the world. Globally, Europe sits at the top of the list of funds raised, with over $6.48 billion. South America is at the bottom of the list, with just $85.74 million raised.

The average campaign is $7,000, and campaigns that can reach 30% of their goal within the first week are more likely to succeed in raising the full amount.

Clearly, crowdfunding is growing and is now a worthy contender to more traditional forms of business financing.

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Four types to consider

If you’re sold on the idea of raising funds this way, realize that you have a few options. Surely, one will speak to you louder than the others.

1. Debt crowdfunding

Just like a traditional business loan, debt crowdfunding involves raising money that you pay back. The most well-known example is Kiva. While Kiva is known for its focus on helping entrepreneurs in developing countries, it is also available to American-based business owners. 

A benefit of platforms like Kiva is they usually don’t look at the same factors to qualify a borrower that a traditional bank will. They care less about your credit history than they do what industry you’re in, how long you’ve been in business, and the level of risk you present to lenders. The larger the loan you want to take out, the more qualifications you’ll need to meet.

2. Equity crowdfunding

Another option when it comes to crowdfunding involves giving investors equity in your business. Yes, it’s a little like seeking angel investment or venture capital, though a bit easier if you’re willing to put in the marketing effort to spread the word about your campaign.

Wefunder is a great example of equity crowdfunding. The site is open to pretty much every type of business, from the corner cafe to the biotech company exploring the benefits of glowing plants. There are different options for the equity someone will get in exchange for her investment, but stocks (with and without dividends) and convertible notes are an option.

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