Odds are, you’ve heard of a successful crowdfunding initiative. Maybe it was a writer or artist trying to get support as they launched a new project, or maybe it was an amateur entrepreneur looking to make a fantastic idea into a reality. But it isn’t just bohemians and experimenters that use crowdfunding – it can also be a meaningful option for small businesses.

In this article, we’ll break down everything you need to know about crowdfunding, including the pros and cons of business crowdfunding.

Does Crowdfunding Work For Small Businesses?

Since it poses an alternative to the often cutthroat and unforgiving culture of traditional financial backing, crowdfunding has a compelling, populist allure. What’s more, crowdfunding has made small companies into big successes.

Among successfully crowdfunded businesses, some of the most famous are tech companies, like Oculus and Pebble Technology. But there are examples of other companies that have reaped massive rewards from crowdfunding, including the Scottish pub chain BrewDog and the phone accessory manufacturer PopSocket.

This is all to say that there are success stories in crowdfunding for small businesses. But does crowdfunding really work in most cases? That question, dear reader, is more complicated.

What Are the Risks of Crowdfunding?

Crowdfunding carries with it some risks for businesses. 

One of the most obvious risks is that not every product is well-suited to the communities most plugged into crowdfunding. The movers and shakers of online backing communities tend to be technologically literate people, aged 26-45, with disposable income. If your service targets a far older or far younger audience, it may not appeal to the crowdfunding audience.

By the same token, a small business that is highly localized may run into challenges in crowdfunding. Since crowdfunding backers tend to be dispersed over wide geographic areas and united only by the Internet, it is not necessarily feasible to launch a local shop, since most users of crowdfunding platforms will not be able to access it.

Finally, an unsuccessful crowdfunding campaign can pose serious risks to your company’s brand identity and reputation. 

The dream situation, of course, is for your crowdfunding initiative to receive a flood of cash, implement all its goals, and reap the rewards with customers. But should that process run into a hitch, whether because of production-side challenges or because your product is disappointing to your backers, you will have created a massive audience of disappointed and frustrated users – many of whom will not be shy about voicing their frustrations.

We’ll be looking at the advantages and disadvantages of crowdfunding next. Keep reading.

The Pros of Business Crowdfunding

Now, to be sure, crowdfunding does carry distinct benefits. If your company produces a product or offers a service that is rather a niche or that is not appealing to traditional financial backing institutions, crowdfunding can be the perfect solution. 

This is because crowdfunding does not require backers to be intimately familiar with your financial situation. Complex risk assessments are not involved like it would happen if you were applying for an unsecured loan. Instead, at its most basic level, crowdfunding only demands reaching out to consumers, articulating your vision, and convincing them that you can genuinely make it happen.

This process was especially beneficial for some of the most striking business crowdfunding examples. Oculus, for instance, could overcome the hurdles of tech industry financial backing by pitching to consumers a simple, tantalizing vision – something that each backer could sign onto individually.

Furthermore, one of the benefits of crowdfunding is that it can achieve success purely based on the quality of one’s product. Whereas traditional financial backers can be fickle, allocating funding based on capricious personal taste or abstract risk assessments, crowdfunding can play to your business’ real strength: its product.

A potent example: while the board game Gloomhaven raised $386,000 on Kickstarter in its first printing, the product’s word of mouth was so strong that the Kickstarter for the second printing netted over $3 million.

The Cons of Business Crowdfunding

On the other hand, there are notable disadvantages to pursuing crowdfunding for your business. Most of these disadvantages emerge from the immense amount of planning, marketing, logistics, and overhead costs that go into running a successful crowdfunding campaign.

One of the things you might be wondering is “what is the success rate of crowdfunding?” Crowdfunding has middling success rates. For instance, while over 226,00 projects have succeeded on Kickstarter, 339,000 have not succeeded – and that lopsided ratio is nothing to scoff at.

An additional con of business crowdfunding is that despite its populist elements, the system has its bureaucracy and regulations to navigate. Different platforms apportion rewards differently. Kickstarter, for example, operates on an all-or-nothing basis. Other platforms pass along all the money a project has raised to the creator. This means that you must be literate in your financial needs before launching your project. 

Considering the high fees and strict rules associated with crowdfunding platforms, these rules can pose serious morale and financial challenges to a would-be business.

Finally, crowdfunding often gives the false impression of instant gratification. In reality, it entails years of work beforehand and afterward. While crowdfunding raises the money necessary to make a product, there are often unforeseen challenges and costs. While you would be able to walk away from an unworkable situation in a traditional business environment, crowdfunding obligates you to see a project through even when you don’t want to do so.

Alternatives to Crowdfunding for Business

If your business is in dire need of financing, there are some alternatives to crowdfunding. 

One option is to engage in asset funding. This process entails using existing company assets, which might include physical inventory or existing investments, as collateral for a loan.

Alternatively, you might pursue a merchant cash advance. In this situation, a company loans money to another company in exchange for a guaranteed cut of daily credit card income. 

How To Set Up a Successful Crowdfunding Campaign in 2023

To run a successful crowdfunding campaign, you need to start acting before the campaign goes live. You have to warm up your audience so that they become eager to participate in it once it starts.

You also have to choose the platform carefully. Check out what sort of public each platform attracts and pick the one that is the most appropriate for your business. Have a look at their features as well, such as languages supported, payment options, etc.

Communication is obviously key for a successful crowdfunding campaign. So all your texts need to speak directly to your audience and recognize their problems, giving them a solution through your business. Produce a professional video to explain your services and let yourself know. High-quality videos usually have a good response from the public.

Final Thoughts

Now you have a clearer idea of the pros and cons of business crowdfunding. Crowdfunding is a microcosm of business financing–it is thrilling, risky, and ultimately promises the possibility of achieving great success. To be sure, however, the process carries risks and advantages, and you should discuss them with a fiduciary advisor if they seem appropriate for your business.

About the Author, James Webster

James Webster, founder and Executive Chairman of ROK Financial has almost two decades of experience within the financial services industry. His passion for helping small business owners and his innovative way of thinking, has allowed him to run multiple successful businesses including National Business Capital & Services. Under the National name, the team was able to help secure over $1 Billion in financing for small businesses nationwide.