Working capital and business growth financing opportunities are becoming available through non-traditional sources. A number of options can be found online with three different types for small business – Debt-based, Rewards-based and Investment-based Crowdfunding.
In debt-based crowdfunding, a $10,000 loan to a small business owner might be crowdfunded by 400 individual people lending $25 each. Over time, as the small business owner pays back the loan, the 400 individuals get their $25 back. Kiva is the best known debt-based crowdfunding platform. Kiva is a non-profit based in San Francisco, and its loans are 0% interest with no fees — although they are limited to $10,000.
In rewards-based crowdfunding, donors receive a product or service related to the project, with the value depending on the amount donated. Rewards-based crowdfunding is a good idea for small business owners looking to get their business off the ground without being beholden to shareholders or weighed down by loan repayments, but the average amount raised can be relatively low compared to the amount of effort needed to run a successful campaign.
In investment-based crowdfunding, the individual investors in the crowd are looking for a financial return — either in the form of equity or debt. Contributors choose to invest in companies they believe will be successful in the future, as the success of the company directly influences the return on donors’ investments. This method of crowdfunding is a good idea for small businesses with growth plans. The advantage of investment based crowdfunding is that you can raise a lot more money — for example, the average amount per campaign on Wefunder is $350,000. The downside is that it is the most “expensive” money — you are either paying a loan back with interest, or giving up equity in your company in exchange for the amount you raise.
As a small business you need to consider the following before embarking on this capital opportunity: How much are you looking to raise? What type of crowdfunding is the right fit for you? What are reputable platforms? Are you willing to work hard to promote your crowdfunding campaign to your customers and community?