Donna Probes: Crowdfund your new business | Company
Securing seed funding can be a hurdle for entrepreneurs trying to start a new business. For many owners, the thought of asking thousands of dollars from a single bank or lender adds a whole new layer of stress to the already overwhelming task of starting a business.
Proving to a lender that your idea is a good investment is not an easy sell. For this and other reasons, more and more entrepreneurs in recent years have switched from traditional financing to crowdfunding to get the money they need to market their product or service.
Crowdfunding has changed the rules for funding startups. He took startup fundraising from a one-lender model to a collective virtual effort, offering financial support to a startup while instantly introducing the business to potential customers. The model showed that the public is willing to contribute capital to worthwhile projects without any expectation of future profit.
There are three main types of crowdfunding, each with different goals and risks.
Rewards-based crowdfunding involves asking your backers for capital in return for an incentive – perhaps the right to be among the first to receive delivery of your new product.
Crowdfunding involves committing a portion of the value of your business to a funder in exchange for seed capital.
The loan between individuals means that you will receive capital in the form of a loan that you are legally obliged to repay.
Selecting the right crowdfunding platform is important because each platform is set up to serve a different purpose and audience. Some of the most commonly used crowdfunding platforms include Kickstarter, the big name in crowdfunding for tech and creative entrepreneurs; GoFundMe, best for personal fundraising; Indiegogo, ideal for tech startups and community projects; Causes, built for nonprofits; Patreon, ideal for musicians, creators and designers; CircleUp, ideal for equity financing of consumer brands and LendingClub, a great option for business loans
There are several important “obligations” when working in crowdfunding. First, make sure your business is set up correctly, including a bank account, legal entity, proper license, insurance, etc. Never promise what you can’t deliver. Always stay in good communication with your funders. And be sure to consult an accountant to find out what portion of the funds you raise is considered by the IRS to be taxable business income.
Crowdfunding is a great way for entrepreneurs to jump-start their business. However, like any means of fundraising, it comes with its own risks and obstacles. Do your research and consult with other professionals who have gone through the process, such as a SCORE mentor.
A panel of experts from various funding sources will be on hand Thursday, July 21 at the main branch of the Traverse Area District Library at noon. This free SCORE workshop will cover crowdfunding and traditional funding. This will help you understand how lenders decide which new business to finance. Visit www.traversecity.score.org.
Donna Probes, MBA, spent 10 years as a small business owner. She is retired from the Traverse City Area Chamber of Commerce and is active as a SCORE mentor as well as a professional music performer. For more information on SCORE, visit www.traversecity.score.org.