Crowdfunding for a Small Business: Pros, Cons and Types

The four main crowdfunding models

Reward, donation, equity and debt crowdfunding each work differently. The right one depends on whether you want to give a product, ownership or repayment.

• Reward-based: backers pre-purchase a product or perk. Common for consumer goods.
• Donation-based: supporters give without expecting a return. Used for causes and personal needs.
• Equity: backers receive shares. Securities rules apply, so legal advice is wise.
• Debt (peer lending): backers lend money to be repaid with interest. See peer-to-peer lending.

Most small businesses use reward crowdfunding because it avoids giving up ownership or taking on formal debt.

What a campaign really costs

Platforms typically charge a percentage of funds raised plus payment processing fees, and you must also pay to produce and ship rewards.

The goal amount is not the amount you keep. Check the platform's current fee page, but expect these costs:

• Platform fee on money raised
• Payment processing fees
• Video, photos and page design
• Advertising to bring people to your page
• Manufacturing, packaging and shipping for rewards
• Taxes on funds raised, which your accountant should review

Illustrative example: raise $30,000, pay about 10 percent in combined fees, and you have roughly $27,000 before the cost of making and shipping the rewards.

The work that happens before launch day

Successful campaigns usually have an audience ready before they go live. Plan for weeks of preparation and active promotion throughout.

Backers rarely appear on their own. Build an email list, a social following or a group of early customers first. Then plan the page and the rewards.

1. Set a realistic goal tied to a real budget.
2. Price rewards so every unit covers its cost and shipping.
3. Prepare a short video and clear photos.
4. Line up the first supporters for the opening days.
5. Update backers often during the campaign.

Our guide to ways to find new customers helps with building that audience.

Risks to know about

Many campaigns miss their goal. With all-or-nothing platforms you receive nothing if you fall short, and fulfilling promises late can hurt your reputation.

Think through what happens if things go wrong:

• An all-or-nothing campaign that misses its target pays out nothing.
• Production delays can anger backers who have already paid.
• A public campaign shows your idea to competitors.
• Funds are not a loan, but you owe the rewards you promised.

If you cannot fulfill at the pledged price, a campaign can put you in a worse position than before it started.

Crowdfunding compared with other funding

Crowdfunding suits a new product with a visible audience. Established businesses with steady sales often get what they need faster with traditional funding.

Crowdfunding is slow to set up, and the result is uncertain. A business with monthly sales and a clear use for cash can usually move faster with other tools. Read our overview of alternative financing options and how to raise capital.

A practical rule: if you have real revenue and need money for inventory, equipment or hiring, funding based on that revenue is usually quicker and more predictable. If you are testing a brand-new product with no sales history, crowdfunding may suit you better.

When ROI Funder is the closer fit

If your business has 6+ months of history and $20,000+ monthly revenue, working capital or revenue-based financing can fund growth without a public campaign.

ROI Funder considers 500+ FICO files. One application takes a few minutes and uses a soft credit pull. Approved, complete files can be funded the same business day, with no obligation to accept an offer.

We start from the payback math: what the money will produce, what it costs and what the monthly-equivalent payment looks like. For a business already selling, that can beat weeks of campaign work. See working capital and revenue-based financing.