Crowdfunding has been gaining traction in a lot of areas in the finance industry especially with the way they are able to support startups as well as small and medium enterprises or SMEs. The industry has been a dependable source of capital requirement. This has allowed businesses to commence operation with the funds that they raised.
In business, there are basically two types of social funding that has a direct correlation with business formation – rewards and equity. There are a lot of tips when you want to start a business but the main thing is that you get the funding that you need to make it happen. There is almost always a front-end cost to starting a business.
This is where crowdfunding comes into the scenario as it offers just that – funds to start the business. SBA.org shares that over 99% of U.S. employer firms comprise of small businesses. This goes to show the extent of how deep the importance is of startups and SMEs. But the truth of the matter is that getting capital to start the venture is not always an easy task .
The reward platform of crowdfunding allows donors or backers to get a specific gift in return of a donation to the business. It can be a specific item related to the product being launched or even the privilege of being able to pre-order the product itself. There are also some businesses that offers to tour the backers to show how they intend to run the business.
The equity platform is a little more trickier but by no means an alien concept especially to seasoned investors. Much like the stock market, equity platform allows backers to own a part of the company in exchange for their investment on the business. This makes them part owners of the venture and can expect a return on their investment.
Social funding is a much needed shot in the arm for startups
Crowdfunding is a great avenue for entrepreneurs who wants to launch a product or an idea but lacks the finances to do so. Here are some of the ways crowdfunding can help these startups.
- Alternative source of capital. A knee jerk reaction for business owners who wants to start a business but does not have the funds is to ask their bank for a loan. This is what most consumers would think of first. Having social funding and throwing it into the mix gives consumers an option on how to raise the money they need. Rather than asking one bank to give out a big loan, they are asking a small amount from a lot of people.
- Better terms compared from traditional lenders. There are misdeeds you commit against your credit score causing your score to be on the low end. Having a low score can either be preventing you from securing a loan from the banks or they are giving you a high interest rate because of it. You need to remember that apart from being able to earn off of the transaction from interest rates, these lenders also account for the amount of risk they are taking in extending you a loan. The riskier or the lower your credit score is, the higher the interest rate can be to offset the potential risk they are taking. Crowdfunding is different in such a way that they look at the viability of your business proposal and decide whether to donate money or not and the terms are better and repayment are lower than traditional bank loans.
- Rewards-based platform can start pre-selling. One of the best starts a business can get is to have customers pre-order their products. This gives then assured orders on the first go which can snowball into more orders in the future. The idea is that some businesses use a reward platform where they give investors the chance to get first dibs on their first production run. This can work if the product is something that really appeals to their market and these consumers wants to have one as soon as possible.
- It gives business owners an insight on market behaviour. This is one of the many benefits of crowdfunding because apart from getting the finances you need, it gives you an insight on what the market wants. This helps a company reaffirm the profitability of their product or idea. When there are a lot of people who wants to have one of their products, it usually means that they are on the right track. They also get to use that data and probably some opinions from their backers or investors to make their idea better.
- It can make use of your network. Forbes.com explains that your network is powerful and can be a source of multiple resources including money. Though not all of them would donate funds to your crowdfunding campaign, the more people who gets to see it increases the chances of getting funded. If they cannot donate, they can share it and the same things happens – the more people who shares, the more people can back the project up.
- You create an immediate customer base. Those investors who backs up your project believes in your product or business idea that they already form your initial customer base. You already have people who believe in your business enough to invest their money in your company. Nurture and communicate with these donors to ensure that you not only maintain them as customers but to be able to grow your base as well.
What to watch out for in micro funding
Washingtonpost.com shares that the Federal Trade Commission or FTC ordered that one crowdfunded game “The Doom That Came To Atlantic City” return the money they collected because they never delivered with the product even though the game was funded more than their target amount. Here are some of the things you need to watch out for.
- Fraud from scrupulous entities. The game might not have set out to dupe their investors but there are crooks who might take advantage of the industry to collect money from people and disappearing after getting the funds. There are people who might be target for identity fraud and theft and crowdfunding might give thieves to do this on a large scale.
- Possible money laundering activities. There are criminal groups that might take advantage of this industry to launder dirty money and funnel them into legitimate business entities. This is something that needs to be closely monitored by the platform itself as well as legitimate investors.
These are just samples of potential threats to the industry as they can take away the trust and confidence of people who will use the platform. All stakeholders from the project initiators to the donors as well as the company itself and even the government needs to work together. . They need to put safeguards in place to prevent these things from happening
There are a lot of benefits that crowdfunding can bring to people who wants to start their own business. They can either offer a small token or reward to investors to get the funds that they need to start the company or offer shares in the business much like how the stock market works. These complements traditional sources of funding for startups and helps fuel the economy as well.