Is crowdfunding good for small businesses?

If you run a small business (or are thinking of starting one) and are considering crowdfunding for the first time, it’s crucial to understand how it works, the pros and cons, and the best platforms to execute a campaign.

Below, the UK’s best company formation agent, Rapid Formations, explains everything you need to know.

What is crowdfunding and how does it work?

Crowdfunding is a way for small businesses to raise money. It is an alternative to traditional lending, where entrepreneurs launch an online campaign, and numerous investors each contribute a small amount of money to the project (hence the term ‘crowd’).

At the end of the campaign, businesses have a pool of funds from various sources to help them launch or grow, and lenders receive a pre-agreed reward in return for their financial support (if applicable).

Types of crowdfunding

There are four main types of crowdfunding based on the reward you’re willing to offer:

1. Reward-based: Investors receive a pre-agreed reward for financial support, such as a free product or service. This is typically best for small businesses launching a new product or developing an existing one.
2. Equity-based: Backers get a stake in the company in return for their investment. This crowdfunding type is best for start-ups in high-growth industries like technology.
3. Debt-based: This is similar to a traditional loan, meaning the business pays back the investment value with interest over time. This crowdfunding type could be suitable for companies wanting to secure financing quickly.
4. Donation-based: Investors donate funds to projects that matter to them, so there is no financial return. This is best for non-profits and social enterprises.

Research these in detail before launching a crowdfunding campaign to understand which will help you achieve your financial goals.

Crowdfunding benefits

Let’s now explore the advantages that crowdfunding can offer small businesses.

Access a diverse pool of investors

Finding people who believe in your business idea and are willing to support you financially can be challenging for new entrepreneurs. However, crowdfunding gives you access to a diverse investor base, giving you a higher chance of finding the right person to back your company.

Also, there’s no need to pitch to numerous potential lenders individually; your crowdfunding campaign is your pitch, which reaches numerous people simultaneously.

Flexible financing

Crowdfunding is incredibly flexible, with multiple types of financing options. This makes finding a suitable agreement that aligns with your business goals and the investors’ desired reward easier.

Brand exposure

There are dedicated crowdfunding platforms where you can raise money and gain significant brand exposure. Successful campaigns can attract public attention, generate interest, and help spread the word about your small brand.

It’s also a great way to network and build partnerships that could be useful later down the line.

Potential drawbacks

You could miss your target

There’s always a risk that you won’t meet your fundraising target. Depending on the crowdfunding platform you choose, you could keep what you manage to raise, or the funds could go back to the investors, leaving your small business with nothing.

Watch out for site fees

Some crowdfunding platforms charge site fees for successful campaigns. Kickstarter, for example, collects 5% from the funds collected plus a 3-5% payment processing fee. Be sure to check these details before choosing your preferred platform.

Legal compliance

The Financial Conduct Authority (FCA) regulates crowdfunding activities in the UK. First-timers need to familiarise themselves with and comply with these regulations.

Every business decision involves risk versus reward, and crowdfunding is no different. It’s essential to weigh the pros and cons carefully to understand whether crowdfunding is the right choice for your business.

Best crowdfunding platforms

Here are our top picks for small businesses:

1. GoGetFunding: With a quick set-up process and a four-star Trustpilot rating, GoGetFunding is an easy and reliable platform for various businesses, industries, projects, and causes.
2. GoFundMe: One of the most popular platforms out there, and they don’t charge any site fees.
3. Crowdfunder: 0% site fees for charities and not-for-profit companies (5% fee applies otherwise). Highly rated by users on Trustpilot.
4. Crowdcube: Europe’s biggest crowdfunding platform, rated ‘excellent’ on Trustpilot. Businesses raised an average of £450,000 in 2023, and over 200 raised over £1million.
5. Republic (formerly Seedrs): Global community of over 3m, 150 investor countries, and over 2,500 ventures funded. There are no hidden fees, and you get a dedicated campaign manager to help you launch a successful crowdfunding campaign.

Choosing the right crowdfunding platform for your small business can be tricky with so many options. If you’re new to this, do your homework to ensure you get the most out of your campaign.

Conclusion

There is no simple answer to whether or not crowdfunding is good for small businesses. As you can see, there’s a lot to consider.

We recommend outlining clear financial goals, a reward program, and a marketing plan before conducting thorough research into potential platforms. If approached correctly, crowdfunding can be a massive success for funding your small business project.

Ready to set up a limited company? The experts at Rapid Formations have got you covered. Simply enter your company name, choose your ideal formation package, and enter your company details. If you have any questions, you can contact the customer support team on 020 7871 9990.