Crowdfunding has proliferated in recent years, with platforms like Kickstarter and Indiegogo making the news alongside celebrity-backed projects and high profile startup success stories. During this time, scores of online platforms have emerged offering small business owners an opportunity to create campaigns to fund projects of all sizes.
Crowdfunding has grown in popularity but is just one of many sources of capital available to small businesses. Read on as we explore how crowdfunding stacks up against online lending and other small business financing options in Canada.
How Crowdfunding Works
Crowdfunding is an offshoot of crowdsourcing, the practice of using the internet to source input and ideas from the masses. Crowdfunding is a similar concept, but the focus instead is on sourcing funds to finance projects in areas spanning arts, startups, social and even personal causes.
Though concepts vary, crowdfunding works by connecting individuals in need of capital (“creators”) with funders (“backers”). In most cases, funders don’t receive equity or ownership in exchange for backing a project – though “rewards” are offered. The main benefit for funders is the opportunity to support something they believe in.
The types of projects that perform better on crowdfunding platforms include artistic projects (like music and film); consumer tech and gadgets; eco-friendly initiatives and social enterprises. Projects associated with celebrities also perform well due to the publicity they garner.
Not All Projects Get Funded
While some projects are a good fit with the crowdfunding model, it’s not a fit for everyone. For instance, there are certain types of projects such as solo projects by first-time entrepreneurs that tend to underperform. Ultimately, there are no guarantees and after much time and effort, you might find yourself still in need of capital and having to start over.
Getting Funded is a Hustle
In addition to the hustle and grind of running your small business, sourcing capital through crowdfunding is a major project in itself. Crowdfunding requires a significant amount of campaigning (and often funds) to raise awareness about your project. Many of the resources one might employ to market their small business might need to be diverted towards promoting your funding campaign. Without the backing of a high-profile figure, you’ll need to rely on compelling copy, creative and media to share your vision, as well as social media marketing campaigns to get to your goal. This often includes upfront investments in video production, advertising and public relations.
Crowdfunding Takes Time
Crowdfunding can only work for you if time is not of the essence. Most campaigns run for at least 4 to 5 weeks. This of course does not include the time ahead of launching required to prepare a strategy, develop materials and set up your campaign. In contrast, many new online lenders such as Lendified offer an application process that takes minutes to complete and provide you with funds in days. So, if time is a factor and you need fast access to capital, crowdfunding is not the best option for your business.
Be Aware of Fees
Like all small business financing options in Canada, there are costs associated with crowdfunding. In some models like equity crowdfunding or “crowdinvesting”, backers get a stake in your business in exchange for their investment. But in almost all cases there are fees starting from 5 – 15% in addition to processing fees charged by the platform. When you do the math, you may find that a flexible online loan is more economical. This is especially true if you take into account the costs associated with creating and promoting your campaign, which can be considerable and without any guarantee of success.
Crowdfunding and Privacy
If you’re looking to gain publicity about your project or idea, crowdfunding might help drive awareness as well as funds your way. However for many small businesses, financing is a private matter. If you’re not ready to share your project with the world or put your financing needs “out there” for all to see, an online borrowing platform offers a discrete alternative.
Many companies have undoubtedly seen considerable success with crowdfunding, but it isn’t for everyone. The same thing goes for small business loans. In doing your research, be sure to evaluate your needs, constraints, and whether your business or project is a good use case either form of funding. If crowdfunding is not for you, the good news is that affordable, flexible online loans are only a click away!
Want more information about your options? Check out our guide to small business funding options.