Crowdfunding for small businesses

Gone are the days when people use to worry more about money and less about the entrepreneurial idea that they had. Raising money for business can be a real challenge, but the evolution of technology and its integration into our lives has started a whole new era. No doubt, funding your idea is still one of the hardest tasks even after decades, but new business models are not dependent on how much your savings or earnings are. It has become much bigger than that since the crowdfunding campaigns came into play.

Crowdfunding is a well-known term across the business world and if you haven’t heard of it, you better start taking notes of it. It is the most efficient and convenient way to raise funds for your business and here’s how it goes;

“Crowdfunding is the process of gathering funds of a smaller amount from a large number of people who are willing to support your idea financially.” Crowdfunding can be done through different platforms – social media and some crowdfunding platforms which bring investors and entrepreneurs to one place. Such platforms aim to expand the opportunities of raising funds for your project by letting you reach beyond your traditional circle of friends, family and relatives.

Types Of Crowdfunding

There are three basic ways of fundraising your business. The difference is all about what you give back to the people investing in your idea or in other words what do you offer in exchange for investors’ payments. Depending upon the type of return that your investing parties are expecting, here is a detailed comparison of the pros and cons each type of crowdfunding offers to an entrepreneur. Understanding cost and gains will help you make a better decision on which one to go for when it’s time to raise funds for a new startup.

Equity-Based Crowdfunding for Small Businesses

This is the most practised type of crowdfunding in the world of business. In this type, the investor or the people who are lending you the money acquire a share in your company or business. The new shareholders or “equity owners” as we call them in the business world will get a financial benefit in return for the money they’ll lend you for your business. It makes them a partner in the profit that your business is going to make.

Equity-based crowdfunding has its own kind of gains and losses. Take a look at the pros and cons for a better understanding of equity-based crowdfunding and to decide whether it will worth your time and effort or not.

Pros:

  • Equity-based crowdfunding can help you raise a much bigger amount than any other type of crowdfunding because of its financial return to investors. When people see a financial return on their money it builds their trust and interest in your idea which simply leads to more capital to fund your business.
  • Many believe that the owner of the business, entrepreneurs, loses control over the company. The fact is quite contrary. The owner of the business can structure the funding in such a way that he can keep maximum control over his company or business network and yet giving people or investors enough share of the profit that lures them to invest in the profitable plans.
  • Unlike the traditional loans, there are to paybacks to such kind of investment. Before investing in your ideas and campaign, an investor is well aware of the risk he or she is going to have. So even if the return is not as expected, you don’t need to pay back the full refund on each shareholders’ investment in your project.
  • Equity-based crowdfunding is a much powerful tool than any other type of funding, mainly because of its return on investment and other features like securities on investment in some cases. You can offer the equity to either the general public or if your idea has a good return rate it may end up attracting much bigger individual investors than the public i.e. other successful businessmen around you. With their experience and investment integrated with your future visions, your business might become the next overnight success story of your town.

Cons:

  • To make it a worth investing project for people, sometimes an entrepreneur has to offer more equity of revenue than he or she might be expected to. It can greatly alter the finances of your company or business and make it more difficult to manage at a steady pace.
  • Setting up terms and conditions on profit for shareholders can also be challenging especially when the shareholders are offered a huge chunk from the profit. Legal barriers are important to be considered because of their technicalities that require a proper consultancy, in that case, it can cost a lot of time, effort and money
  • Any campaign, let alone equity-based crowdfunding, when run for a longer time cost a lot sometimes in term of money and some time in term of efforts. Since equity-based crowdfunding is the type in which the investors are more conscious about the return on money than any other type, if the return on investment takes longer than expected can put you under a pressure from a shareholder which can further lead to more losses than actual gains.

Reward-Based Crowdfunding Crowdfunding for Small Businesses

Reward-based crowdfunding is the cheapest and most common type of raising funds for businesses that offer any particular product or service. Just like equity-based crowdfunding, reward-based crowdfunding is also non-payable funding but the only difference is that you have to pay your investor in form of a product or service.

Apart from the basic difference in return on investment, reward-based crowdfunding is a very unique way that has its own advantages and disadvantages compared to other types. See it for yourself

Pros:

  • Reward-based crowdfunding is a fundraising campaign as well as a powerful marketing tool for the companies that believe their product really fills a gap in the market. It doesn’t just attract the people who are willing to spare little cash for your idea but the word will also reach your potential future buyer once the product is launched in the market.
  • For a business just starting, customers’ validation plays a key role in its progress. Once the product is out, even though in form of a reward, it can gain access to the feedback of real and potential users of the product or service. Use it constructively and by the time you’ll reach enough capital to take a long shot, your product will be developed a lot from where it started and can do better than its previous version and even from competitors.
  • When we said it’s the cheapest mode of crowdfunding, we really meant it’s the cheapest form. You get to keep 100% control and share of your business. There is no profit sharing obligation on you. The fact is that you have to bear some extra production or service rendering expenses, but these will be much lesser than cash flowing your way.

Cons:

  • Such a type of fundraising can not raise a large amount of capital as it involves most of the individual payments in reward for small rewards in form of products or services. If you are a business seeking much larger investments, reward-based funding is not for you.
  • In some cases, if your idea is genuinely creative and unique, exposing it to market without enough capital backing it up can put you up in a really vulnerable state. Competitors can replicate and introduce to a much larger audience taking your credit and attention to themselves.

Donation-Based Crowdfunding Crowdfunding for Small Businesses

It’s a no-return way of raising funds for non-profitable purposes. The only return donors gain from this type of fund is the satisfaction to support a greater non-profitable cause. Islam has a lot of elicited teaching to encourage and support such kind of crowdfunding for the needy in and around your communities. One such crowdfunding is zakat and it is known to be the largest donation amount in the world with Muslims donating about a total of half a trillion dollars every year to the one that really needs the money.

Every year at the end of the Holy Month of Ramadan, Muslims roll 2.5% of their money towards the poor and needy people. You can be a part of these donations too if you have a vision of being a voice for those who can’t reach or ask for help. What’s in it for you? You’ll get more than money!

Pros

  • Supporting and becoming a messiah for people who don’t have enough to put food on their table is a noble act appreciated and rewarded by One and True Allah Almighty. It attracts barakah in your life and your own doings. If you give it more than you take, you’ll receive more than you expected. It’s a system devised by Allah (SWT) for rewarding His humble servants.
  • Standing up for a cause as noble as providing or supporting the one who really needs you, don’t just build your reputation in Allah’s (SWT) eyes, but HE (SWT) elevates the one who does good to others in eyes of his peer too. Running donation-based crowdfunding campaigns builds a strong reputation of your personality in your community that can benefit your own small or large business by attracting both barakah and attention.
  • Every action human nature take is to find contentment and peace in this world. Supporting and acting in favour of such good causes provides you with an unmatchable satisfaction. The beauty of such divine actions is that everyone – from donor to collector every single person feels a common emotion of contentment and satisfaction from within, which is the ultimate reward of this type of crowdfunding.

Cons

  • In the modern-day world, where deceiving has become a very common and breezy job, building trust has become more difficult than ever. In such kind of crowdfunding, sometimes building an authority to gain trust and actual peoples’ money for good cause takes a lot of effort and time.
  • Since every crowdfunding incurs some cost. In the case of equity-based and reward-based, you can still make up for setting up or running campaigns. On the other hand, in donation-based crowdfunding, you might have to pay the administrative and maintenance cost from your pocket. We don’t deem it as a con but rather a precaution before starting the campaign as rewards are from God and pertain to spirituality rather than materialism.

How Is Crowdfunding Different From Peer-to-Peer (p2p) Lending?

Crowdfunding is entirely different from peer to peer lending or mostly known as p2p traditional financing. To some extent, we can say the two methods of collecting capital are the same where people let you have their money. It’s what happens after is that make these two different.

In crowdfunding, people let you have their money for your business and in return, you are bound to provide them with a benefit except if it is donation-based crowdfunding. In the case of peer to peer lending, it works more like a traditional loan but not by any bank or financial institution which saves both borrower and lender time and a big amount of fees to process and access the loan money.

Compared to crowdfunding, you don’t share the equity or any product or service with the lender of money. It is a simple loan in which you have to repay the payment to lends within a specific period of time and under certain terms i.e. interest and fees and conditions which carries with what kind of platform you are opting to initiate your p2p lending. The p2p lending models in the western world are not compliant with Islamic laws. In Islam, you can use return on your investment but up to a certain ratio or percentage which is Syariah-compliant. Establishing a business under the western model of interest and return is forbidden in Islam as it can sometimes be very demanding and create difficult situations for borrowers especially when the business is not doing well.

So, where to get Syariah complaint p2p lending for your business. MicroLeap is a Muslim initiative to promote fast, easy and Syariah-compliant short-term loans. The platform has filled the gap that traditional banking was ignoring for years i.e. to support small businesses and micro-entrepreneurs. For years, banks have always focused on lending their money to only those businesses that they deem worthy of investment. Small businesses industries were either disqualified from their loan criteria or they were ignored owing to their smile sizes. MicroLeap has given access to all small businesses and micro-entrepreneurs to a pool of lenders who is willing to lend their small amount of money on Syariah-compliant terms and help them grow more.

Whether it’s crowdfunding or p2p lending, the use of technology to avail beneficial services has become a new normal. With the integration of technology, your capital is few clicks away. What about people with greater ideas and less experience in finance and technology? There are a lot of other financing avenues out there to help such people. Here’s the detail of where to get capital from a suitable source for your business. Apart from the advanced technological platform, there are lot of sources to fund your business which works in traditional ways but has more advanced term or operation that best fits the new era of business.

How To Do Crowdfunding?

Thanks to the internet and the latest technology, your business can now reach millions of people within and outside your country. Just like your product or service can reach distant countries, crowdfunding camping can make it there too. The Internet offers a wide variety of crowdfunding websites bases on what type of funding you are looking for; equity-based, reward-based or donation-based. Follow a simple two-step guide to make sure your project gets what it deserves.

Select A Suitable Platforms

First off, you need to find a suitable crowdfunding website that works in your country. Fundable, Crowdo and Kickstarter are examples of some renowned websites that are being used by entrepreneurs all around the world and especially in South East Asian countries like Indonesia and Singapore. These websites host hundred and thousands of campaigns of fundraising with new projects being funded by investors who are interested in backing up your idea with money.

You can start an equity-based, reward-based or donation-based fundraising campaign. And the good thing about these platforms is you can do it all by yourself in a matter of minutes. Keep in mind that each platform charges a fee on your collectables it can be a portion or a percentage that depends on what kind of platform you are using. The most important that you must know before starting a campaign is to think through the duration and the amount of your project. If you set a goal collecting a significant amount and fail to reach your goal, the platform will not let you have the amount of money collected at the time when you duration of the campaign ends. Always be realistic about the goals you set on such platforms.

There are few factors that you must consider before starting your campaign on a particular platform. These factors include your location e.g. country, type of crowdfunding you are looking to make, budget and many other. You’ll understand these once you sign up for a website that suits your need. Here’s a list of some popular sites to raise funds for your business.

  • Crowdo — A platform accessible to Malaysia, Singapore, Indonesia and some other Asian countries. Crowdo allows its users to start campaigns of Peer-to-Peer lending and equity-based crowdfunding. The platform allows you to run long and short term campaigns with reasonable processing fees of money. You can even buy different packages to use additional tools to make your camping more appealing and trustworthy.
  • Patreon — The platform is available in the US, South East Asia and 180 countries across the world, you can check your country on the list given on the website. Patreon is reward-based crowdfunding, mostly suitable for artists and online content creators. You can release specific content or piece of art as a reward for your backers. In return for money collected, the platform charges a percentage of the collected money depending on your subscribed plan
  • Kickstarter — It allows residents of the US, UK, New Zealand, Singapore, Denmark, Hong Kong and Europe to run reward-based crowdfunding campaigns. If you are related to industries like photography, content creation, designing or any creative work, Kickstarter provides you with all resources to collect capital to back your creativity. It charges 5% fees on camping and 3% to 5% depending upon the amount collected.
  • Fundable — A renowned platform across the US and outside where it let you create a C-corp account ( A business account with a US address and Bank account without being a US native). Fundable offers its user to run two types of campaigns i.e. Reward and Equity-based camping, whatever you want. It does not charge any additional processing fee except the one total payment of setting you up and the selected plan.
  • Indiegogo — The list of countries the platform operates include Singapore, Hong Kong, US, New Zealand & Europe. It was an idea that started as an equity-based crowdfunding platform and later was converted into a reward-based funding site. Just like any other platform it charges a 5% fee on all funds collected.
  • Crowdfunder — Crowdfunder has a vast list of countries that includes Singapore, Hong Kong, US, New Zealand, Denmark, Europe and a total of 150 countries all across the globe. The website takes leverage over its counterparts by offering all three types of crowdfunding i.e. Reward, Equity & Donation-based crowdfunding. It charges a fixed 3% of the total amount raised through any type of comparing.
  • GoFundMe — This is a donation-based crowdfunding platform available all across the globe. Though, its availability in some countries is restricted due to economic and social reasons where raising funds for a cause is prohibited by the local government. Check the website to know whether it is supported in your country or not. It can be a great place for a social cause to meet its backers.
  • Crowdcube — The platform is of massive size with its presence in the US, UK, Australia, Europe and 100 other countries around the world. Crowdcube is best for raising funds of much larger amount than most of the crowdfunding sites due to its equity-based crowdfunding and a much bigger pool of influential and potential investors who are looking for a reasonable return on their investments. Due to larger funds, the platform asks for a 7% fee on collectable money to process it for your use.

  • Chuffed — Chuffed has been operating in the US, UK, Singapore and Europe and outside these boundaries, it provides users with assistance to set up a campaign and transaction mode to give them access to collect money. The website has a great network for people who are either running or supporting donation-based crowdfunding for a social cause. Unlike any other crowdfunding platform, Chuffed do not charge any fee to the receiver but the donor pays a donation fee that is about $3 on a $100 donation.

  • LaunchGood – we saved the best for last. Muslim crowdfunding platform, LaunchGood is for Muslim charities, projects as well as small businesses with a focus on Islamic projects or Islamic businesses. For example, the popular Islamic cartoon series, Omar and Hana, have successfully raised funding via this crowdfunding platform for its rewards-based crowdfunding project (such as Omar and Hana Merchandise). They accept fundraising in nearly all Muslim countries, although you may want to check if its available for your country. They do not take any fees from the fundraisers.

Prepare a Confident Pitch

Next, you need a powerful pitch to convince people to invest in your business. Think of it as you are selling a product or service or the share of your company. Your pitch must have all the essentials to convince your investor. Spare no detail when starting the campaign. State the obvious and be clear on what you intend to do with people’s money and how you plan to give them in return. The more you take people in confidence with your pitch, the better the chances that they are going to pay for your creative ideas.

What Businesses Are More Likely To Attract Crowdfunding?

You can run a campaign for any business idea on the platforms. There no formal restriction on running the crowdfunding campaigns of some specific businesses from these platforms. However, not every business get the same amount of attention or more importantly enough amount of funds as others do. This reason can be explained by changing trends in the real-world market and underlying factors of return on investment, for example, an equity-based project is going to get more funds compared to a reward-based project as financial benefits are long-term and more lucrative to the same amount of investment. You can run a successful business campaign for the following businesses

Technopreneurship

Technology has been a profitable niche since the era of the internet. The basic technology that was once discovered to get the job done has now become more advanced to look for the best solution to the problem. If there is anything people love to get their hands on immediately is the new technology to ease off their routine both in-home and at the workplace.

Integration of the technology. in financial matters and institutions is something that no one can ignore or deny its presence. Fintech, a name given to technology and finance has a separate stream of technology. Any project that pertains to introducing newly designed technology or developing the existing ones can help you raise larger funds than any other stream of business. Fintech technologies lure more and more investors due to their increasing demand in the modern world. Entrepreneurs can now reach and interact with people who truly understand the essence of their ideas and skills. More and more people are investing in such ventures. It is because most of the folks have realised that demand for this niche is growing up as time passes.

Real Estate Business

Almost everyone is aware of the fact that property increases its value with time. In other words, you’ll see less often that a piece of land sells off at lower prices than it was purchased. This very trait of the business makes it a perfect candidate for the list of crowdfunding businesses.

One of the reasons the real estate business is more likely to attract people to invest in that building authority of your project is convenient. When running such a campaign, entrepreneurs usually gives a whole feasibility report that mentions all the detail of the project and property itself. For example, if you have to crowdfund a project of 2 houses, you’ll have to provide a detailed document of when the project will start and how long will it take to get a return on the project and most importantly where the project will start. An investor knows all the important dates and events and he can see for himself whether the project is worthy of lending money or not. Here’s how to crowdfund a real estate business on using more advanced platforms.

Product Or Service Business

Reward-based crowdfunding is best for any product or service business type. Such businesses demand much lesser investment compared to other types of business where the fund is generated by equity-based crowdfunding.

You need to launch a product or service that is not already on the market and you believe that it can help make people lives better, what’s any other good way of offering investors to have the product or service subscription for free in return for sparing some bucks to support the product or service itself. This method also works as an excellent marketing tool for your business. The feedback from your early investors can help you develop a product or service to a whole new level and by the time you’ll get hands-on your full sum of capital, you’ll become more and more confident with your business and its product or service.

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