Crowdfunding for business: what you need to know

Crowdfunding allows entrepreneurs to raise funds for their small businesses using an online platform. After creating a fundraising campaign, interested people can donate cash to your cause, often in exchange for a reward or equity in the business.

Crowdfunding is Small Business LoansNot only does this provide business owners with a relatively cheap way to raise capital, but it also helps promote their business products and services and build a loyal customer base.

Once you've chosen a crowdfunding platform and verified that it can be used for business purposes, you'll usually fill out a business profile on their website. Some crowdfunding companies may review your application before allowing you to use their platform, but others will let you run a campaign right away.

Campaigns usually set a funding goal and deadline. Some platforms allow you to keep the funds raised if you don't reach your goal, while others don't. Fees for crowdfunding platforms are usually paid through a percentage of the funds raised, a monthly fee, or even equity in the business.

Crowdfunding has two advantages for small business owners. Funding for your business idea It also helps you advertise your products and services.

Crowdfunding allows you to reach a wider group of potential investors. Crowdfunding often begins with sharing a request for financial assistance with family and friends via social networks.

Unlike business loans, crowdfunding Bond FinancingWith crowdfunding, there is no obligation to lend or repay funds.

The two most common types of crowdfunding for small business owners are reward-based and equity-based.

in Reward-based crowdfundingDonors receive a product, service, or small gift related to the project depending on the amount of their donation. For example, a $5 donation might receive a handwritten thank you note, while a $50 or $100 donation might provide early access to a company product or service.

Rewards-based crowdfunding can be a good option for small business owners who want to launch a business without giving up any equity in the business or making loan payments.

Here's how popular rewards-based platforms work:

Fundable is a crowdfunding site for small businesses that offers a choice between reward-based and equity-based funding (more on that below).

When using Fundable as a rewards-based platform, it's all or nothing. You set a goal, decide on the campaign duration, and choose your reward. If you don't meet or exceed your goal, you don't raise any funds. Fundable doesn't put a limit on campaign duration, but says the average is 60 to 90 days. You'll have to pay from $179 per month to use Fundable, with an additional 3.5% per transaction for rewards-based campaigns.

Businesses can use Kickstarter to raise funds for their projects. You must decide on your funding goal, the duration of your campaign (anywhere from 1 to 60 days), and how you want to reward backers. It's also an all-or-nothing funding model, meaning you don't get any funds if you don't reach your goal. Kickstarter charges a 5% processing fee, and payment processing fees range from 3% to 5% per transaction.

Indiegogo is similar to the other two platforms: you set a goal amount, set rewards for donors, and set a deadline for your campaign (up to 60 days). However, you have the option to keep the funds raised on Indiegogo if you don't reach your campaign goal, and you can continue raising funds through Indiegogo InDemand after the deadline. Indiegogo charges a 5% processing fee on funds raised in your campaign, plus a 3% payment processing fee.

in Equity-Based CrowdfundingDonors receive shares in the company according to the amount of their donation. Donors typically choose to invest in companies they believe will be successful in the future, as the success of the company directly impacts the donor's investment return.

This method of crowdfunding can be a good option for small businesses with solid growth plans. You'll give up some ownership of your business, but you won't take on any additional debt.

Some studies have shown that gender can affect the success of a campaign depending on the type of funding, with female entrepreneurs performing better with reward-based crowdfunding and male entrepreneurs performing better with equity-based crowdfunding.

Here's how popular equity-based platforms work:

As mentioned above, in addition to reward-based funding, Fundable also offers equity-based crowdfunding for a monthly fee of $179 to use the platform. With Fundable, equity funding goals can range from $10,000 to $10 million. Campaigns don't have a deadline, but they must be renewed every 90 days. Fundable encourages setting small, achievable goals.

Wefunder requires companies using its platform to raise a minimum of $50,000 from people they already know before opening their business campaign to Wefunder investors. If you don't reach your goal by the fundraising deadline, it offers a one-time extension of up to six months. If you're successful, Wefunder charges a 7.9% commission and a $1,000 annual management fee.

Companies can raise capital through Republic if they pass the company's vetting process. Republic says it accepts fewer than 5% of applicants, but of those, more than 90% of companies meet their minimum fundraising goal. Campaigns can run for 60 days. The platform charges a fee of 7% on cash raised and 2% on securities issued, plus payment processing fees that typically run up to 2.25%.

Your business will stand out in the crowd: The success of a crowdfunding campaign depends on its ability to capture the interest of potential donors and investors – whether you have a unique product that fills a void for consumers or a strong personal or business story that makes investors want to take a chance on you.

Investors care about your rewards: Make sure you offer a reward that's enticing enough to entice them. The reward can be a product or service, but it can also include tutoring, classes, special invitations to company events, etc.

You have a wide network: Having family, friends, and a business network who support and promote your cause can strengthen your fundraising efforts. Without a strong promotional base, it will be difficult to reach your fundraising goals.

While crowdfunding can be effective for securing startup capital and generating interest in your product, it may not be the best solution for long-term business financing. Other ways to fund your business include:

For small businesses seeking financing, traditional lenders like banks and credit unions are a good starting point. Bank loans generally offer the most competitive interest rates and terms, but often require a good credit score and a multi-year business history to qualify.

SBA LoansSmall Business Administration-backed loans are an alternative if you can't qualify for traditional bank loans. These loans offer low interest rates and long repayment terms, but typically require good credit and a multi-year business track record. If you need less than $50,000 in funding, SBA Microloans That could be a good option for you: Microloans can have more flexible eligibility requirements than other types of SBA loans.

If you can't qualify for a bank loan or SBA loan, small business loans offered by online lenders are another option. Online Business Loans In many cases, some online lenders have less stringent eligibility requirements. Startup Business Loans and Business loans for people with bad creditHowever, these loans often have higher interest rates and shorter loan terms.

Because eligibility is usually based on personal credit rather than business history; business credit card They're a good option for financing your start-up: A business credit card gives you access to a revolving line of credit that you can use for current and future business expenses. It also helps you build your business credit, making you more attractive to future lenders.

If your business history is short and you are unable to obtain bank financing, Personal loans for business financingPersonal loan amounts may be smaller than business loans, but in some cases, interest rates may be lower for qualified borrowers.

Start-up business grants Another funding option to consider. This free funding is provided through government agencies, private foundations, and small business incubator programs. Business grants can be designed for specific groups, such as: Women's Business Grants or Veterans Business GrantsHowever, competition for grant funding is fierce, so you will need to devote a significant amount of time to research and apply.

Former NerdWallet writer Jackie Zimmerman contributed to this article.