Crowdfunding for small business: the complete guide

Crowdfunding is a game-changer for thousands of small businesses. But how does it work and where should you go to get started? Crucially, do you pay back crowdfunding once you’re rolling?

According to Yahoo Finance, the global crowdfunding market is set to grow at a rate of 16 per cent over the next five years. Social media has played a big part, providing immediate, clear marketing campaigns and ready-made platforms for businesses looking to mobilise engaged audiences, raising cash while avoiding the bank.

Here’s how it works, and how you can get started.

What is crowdfunding?

Crowdfunding is a strategy for raising finance. You ask lots of people at once for small individual amounts of money, usually through an online platform. You’ll need to decide on a target figure, pitch the details of your next business phase or project to your would-be ‘crowd’ of investors, and then raise the full amount to go ahead.

Are there different types?

Yes, and it’s important to remember that some forms of crowdfunding – for example reward and donation-based crowdfunding – aren’t regulated by the Financial Conduct Authority (FCA).

Here are some of the different types you can use:

  • investment-based crowdfunding – people invest in your business for a stake in return
  • loan-based crowdfunding – money is lent to your business at a set interest rate, also known as peer-to-peer or peer-to-business lending
  • reward-based crowdfunding – you give a reward in return for someone’s investment, usually linked to the project you’re promoting
  • donation-based crowdfunding – people donate to your charity or cause, sometimes for something promised in return

How does crowdfunding work?

You’ll usually use an online crowdfunding website to register your project and start raising money. We’ve listed a few of the most popular sites below.

Getting started (and the best crowdfunding sites for small business)

With a huge global market, there are lots of options for where to host your crowdfunding project. Here are a few of the UK’s most popular:

  • Crowdfunder – currently 100 per cent free for fundraising in response to Covid-19
  • Crowdcube – used by everyone from Monzo to tiny fledgling startups
  • Seedrs – features Covid-19 support and £935.3 million in investment to date
  • Kickstarter – specifically for creative projects and ideas
  • Indiegogo – focused on early-adopter investment for new tech and design projects

Once you’ve picked your platform, you’ll need to register your project. Remember, as well as registering, you’re telling your audience about you, what you’re trying to achieve and why their investment is so important, or valuable.

Hitting your target

Once your campaign’s set up, it’s time to promote it on social media, your email list and just about anywhere you have an engaged audience. Explain how their small donation is going to help you make your business better for them, as customers. Keep them up to date with how the fundraising’s going, and drive momentum.

Remember, many crowdfunding websites or platforms take an all-or-nothing approach. That means, if you don’t hit your target, no money is paid. So it’s worth going all-out on your other channels to raise awareness.

Where’s the money?

Investors can pledge money at any point during your campaign, as long as it’s within the timeframe you set from the start. Once you’ve hit the target and the campaign closes, your crowdfunding website will take a cut from the total amount raised.

You may also need to factor tax responsibilities into your crowdfunding plans. For example, reward and investment-based crowdfunding is usually classified as income, and may be subject to income and sales tax.

Do you pay back crowdfunding?

It depends on what kind of crowdfunding you’re going for. With donation and reward-based crowdfunding, people are putting their money in for lots of different reasons – often through personal or social motivation – but not usually for a hard financial return.

Loan-based crowdfunding means that investors get their money back, usually with interest. And with investment-based crowdfunding, people put money in, usually for a share of your business. So they’ll see the value of their shares rise and fall, but you don’t need to pay back their investment.

Check it on https://www.simplybusiness.co.uk/knowledge/articles/2020/07/crowdfunding-for-small-business/

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