Crowdfunding can be an excellent resource for individuals and small businesses when they are just starting out because it allows them to raise funds quickly, from people across the country. These platforms have only increased in popularity because they can raise funds, brand awareness, and goodwill all at once. But not all crowdfunding platforms are suitable for every project.
If you're thinking of using crowdfunding to jump-start your new project, follow these tips:
Choose the right fundraising type
Crowdfunding comes in four basic types:
- Donation: Donors don't receive anything in return for their contribution.
- Example: GoFundMe
- Equity: People who contribute funds become partial owners of the business or project.
- Example: CircleUp
- Reward: Contributors receive a product or gift in return for giving certain amounts.
- Example: Kickstarter
- Debt: Funds raised on the site are a loan rather than a donation.
- Example: LendingClub
Each type has its strengths and drawbacks. Depending on the nature of your project, one of these options will likely work better than the others.
Know if your platform is "all or nothing"
On several crowdfunding platforms, you must set a specific goal for how much money you wish to raise. On "all or nothing" platforms, such as Kickstarter, you only get your funds if you reach that set goal. Consider the implications of an "all or nothing" campaign when choosing a platform, as well as your initial fundraising goal.
Keep an eye out for processing fees
Remember that crowdfunding sites are businesses, too. They continue to operate by collecting a fee or percentage from every fundraising campaign they host. Kickstarter charges a 5% fee, as well as a processing charge of 3-5% on each transaction. Indiegogo collects 30 cents per transaction in the U.S., plus a 3% processing fee.
In addition to the logistics of specific platforms, those considering crowdfunding should also consider the tax implications and legal ramifications of this type of fundraising. Ensure your business starts out on the right foot by consulting with a professional and learning more about your options.