Funding your business is never easy (unless perhaps you have very rich parents). If you’re an entrepreneur on your own, and come from a humble background, you may face financial challenges starting a business. Your business idea may be very novel and has a lot of potential. However, you just won’t be able to finance it on your own.
Many entrepreneurs traditionally go to the banks or other financial institutions for a loan. However, there’s an alternative way to gather funds nowadays called crowdfunding.
What exactly is ‘Crowdfunding’?
Crowdfunding is basically a method for entrepreneurs to gather funding for their business through online platforms. These online platforms allow then to reach out to the public. In essence, crowdfunding allows people from all walks of life to become donors to your business.
Traditional forms of business funding usually involve only one or a few sources, including banks and investors. The amounts of money they loan to you or invest in your project tend to be very high, in the five digit category. Therefore, this puts a lot of pressure on you to make the business succeed.
In crowdfunding however, the contributions are much smaller. People can even give as little as RM 10 or even RM1. Most online crowdfunding websites are also very transparent and they list out the name and amount of every contributor. Crowdfunding also allows you to solicit contributions from all over the world.
Although the practice of trying to fund your business by asking friends and relatives is not new, crowdfunding online gives more transparency and credibility to the process. Crowdfunding is very popular among small startups and social entrepreneurs who often get rejected by banks due to the uncertain nature of their future and their inability to guarantee the success of their undertakings.
There are Different Types of Crowdfunding
Basically, there are three different types of crowdfunding available. Most of them run on online platforms which you can sign up for. All of these platforms require you to present a full business plan. The more information you provide the better. These platforms often encourage entrepreneurs to provide visual and audio information too, in order to attract more attention from the public.
1) Crowdfunding through Donations
This was one of the very first crowdfunding concept and you’ve definitely heard of websites like GoFundMe and Kickstarter. Through these sites, you start a page and members of the public can contribute however much they want. You are free to set a minimum and maximum amount for contributors to give. However, most entrepreneurs don’t set a maximum.
In donation based crowdfunding, the entrepreneur does not have to repay anyone. Basically, you are free as a business owner to manage the money however you see fit. Your donors do not have a say in how your run your business.However, proper etiquette dictates that they should at least update their donors on the progress of the project from time to time.
Donations based crowdfunding is very popular among those who are social entrepreneurs. This means that they’re running businesses that will benefit communities, rather than merely being a profit based project. It has also been used by individuals to help fund emergencies and necessities, such as funding a life saving surgery or putting a child through school.
2) Crowdfunding through Equities
In this model of crowdfunding, you allow strangers to invest in your business as stakeholders with a profit sharing arrangement. It’s almost like making your company a listed company where everyone who invests in it will own a share of the company. Therefore, everyone that invests in your business has a say on how it is run.
The arrangement is much more complicated than a donation based crowdfunding. This is because you as the entrepreneur will have to prepare detailed financial reports and organize Annual General Meetings for all your investors.
Investors will also be expecting some form of profit sharing or pay-out, which you will have to do throughout the tenure of your business. Investors can come in the form of individuals or venture capitalists. In order to attract bigger institutions to fund you, you’ll have to present a very convincing business plan. Keep it simple and easy to understand, yet interesting and attractive enough for investors. Marketing is of course very important to sell yourself to multiple investors.
3) Crowdfunding through Loans
This crowdfunding concept is a little different from Equity funding, as it requires you to pay your back your creditors (people who lent you the capital) after a stipulated time. Usually, a small percentage of interest will accompany you repayment to the ‘loans’ you receive. This concept is almost similar to taking a bank loan for your business. However, instead of taking a loan from just one big financial institution, you’re taking small loans from multiple people or organizations. These loans can be very small amounts like RM100 or less, which is why it’s very different from bank loans.
The interest rate and loan repayment period is a matter of personal agreement between you and your creditors. Therefore this type of financing is more flexible and you’ll enjoy better repayment rates and be able to work out a repayment scheme that benefits you and your business best.
Why Should You Consider Crowdfunding?
Crowdfunding is a viable alternative to more conventional methods of business capital funding. It’s definitely getting more traction as entrepreneurs view it as a more relaxed and beneficial source of funding. These are among the things that crowdfunding can offer, which conventional loans can’t:
Feedback and Validation from Customers
Whether a person is donating, investing or loaning you the money, you can be assured that they believe in your idea. This can give you the confidence to pursue your project wholeheartedly, knowing that there are people out there that will buy your into your idea, whether it’s a product, concept or service.
In addition to confidence, you’ll be able to get feedback in order to improve on your business plan. There will be more people who will be able to see gaps, weaknesses and flaws of your plan and give you ideas on how you can improve on it, or add to it.
Multiple Sources of Financing
This aspect is particularly important. In conventional business funding, you’ll typically depend heavily on only one or two sources of funding. Should there be any financial problems and the funds don’t reach you, your entire business plan will collapse. However, if there are many sources of funding, having some of them pull back at the last minute is not a big deal as you can still carry on with the main plans and look for more contributors as time goes by. This is a form of security for your business too.
More Exposure for Your Business
Crowdfunding involves a lot of hard work in terms of marketing. Most commonly, entrepreneurs use social media to reach out to the general public, hoping that there will be people who will give financial support. This means that more people will know about your planned project.
You’ll have to know the best way to reach the right people on social media. Remember, it’s not so much how many people you reach, as who you reach. You have to identify your target market very early on in your business plan so that you don’t waste time and resources.
Crowdfunding is a novel method to fund your business, whether you’re a new entrepreneur or looking to expand your current trade. It’s always good to consider the benefits of this funding for your business, especially if conventional capital sourcing doesn’t seem to be working for you.