Most new businesses decide to use traditional funding methods that often turn out to be unfavourable. A loan from a bank and your own savings might be insufficient to start a business. Crowdfunding, which has recently become extremely popular, might be the safest solution, especially for startup owners. There are several types of crowdfunding that you can resort to depending on your company’s needs. How to use crowdfunding to start a business? Read our article and follow 3 simple and easy steps.

How to use crowdfunding to start a business? – table of contents:

  1. Study types of crowdfunding
  2. Choose your audience
  3. Get ready for every scenario
  4. Summary

Study types of crowdfunding

How to use crowdfunding to start a business? If you plan to finance your business in this way, you need to know that you have several options to choose from. Some of them will be more appealing to you than others. It’s up to you to decide which one will be perfect for your business:

Debt-based crowdfunding – In this case you must repay the money collected from sponsors on the date specified in the agreement. The platform that supports this corwdfunding model is Kiva. In contrast to customer authentication in a traditional bank, the website takes into account far fewer factors. It works on the following principle: the bigger the loan you want to take out, the more requirements you have to meet. It is not only available for entrepreneurs in developing countries, but also for businesses based in the United States.

Rewards-based crowdfunding – It is mainly about encouraging potential investors to support your project in exchange for incentives in the form of rewards. You do not sell shares or repay the funds raised. You send a thank you gift for their contribution, and it can be: a product, service or item that reflects your company’s activities. The most famous site that uses this model is Kickstarter, where 10 million people have already raised the necessary funds to start their own businesses. It doesn’t matter if you’re raising money for a new clothing brand, a tech startup, or releasing your own album. People who find your idea attractive will eagerly support it financially.

Equity-based crowdfunding – It requires providing a certain pool of shares to investors who have decided to contribute to a given project. This is a type of crowdfunding which is most commonly used by startups across the world. Wefunder allows you to collect funds for almost any business from a restaurant to an engineering company. Most importantly, you decide how much capital you want to keep without having to repay any loan.

Donation-based crowdfunding – In this case, you are not obligated to provide any rewards to the donors or repay the raised funds. The most popular site of this type is GoFundMe. Collections here are organized for personal reasons e.g. difficult family situation or substandard conditions at animal shelters. Therefore, it is not a preferred form of business support.

how to use crowdfunding to start a business

Choose your audience

Obviously, when you offer products for kids, your target audience will be women with children, and not sponsors of technology gadgets. By that logic, you need to research the market and its needs before launching your project.

Also, the amount that you want to raise should be within your reach. If you don’t choose wisely, you will not only fail, but also get discouraged from trying any further. Raising money using crowdfunding is not that easy, but the effect of a job well done can exceed your expectations. Check out how other users approach similar campaigns, which rewards attract backers the most, and which don’t. This will help you determine what to avoid during your own campaign, and what you can do to make it successful.

Get ready for every scenario

When you run a new business, unplanned expenses can arrive at any time. In order to deal with this situation, make sure that your budget is well thought-out and flexible, so these unexpected costs don’t break it. Also, using crowdfunding to finance your business does not mean that you can’t resort to other fundraising methods.

How to use crowdfunding to start a business – summary

Crowdfunding has become a dangerous competitor to traditional forms of fundraising. It is undoubtedly a powerful tool which, if used correctly, can bring success to newly established businesses. It opens the way to obtain funding, but also gives publicity to any company that has properly prepared its business plan. Using the power of the Internet, companies financed through crowdfunding are gradually developing all over the world.

You’ve now learned how to use crowdfunding to start a business. Read our other articles on crowdfunding: Types of crowdfunding.

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Author: Andy Nichols

A problem solver with 5 different degrees and endless reserves of motivation. This makes him a perfect Business Owner & Manager. When searching for employees and partners, openness and curiosity of the world are qualities he values the most.