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Crowdfunding: Pros, Cons and Helpful Tips

Closely held businesses with growth plans and budding startups with great potential can find themselves in a “catch 22” of finding funds: In order to get funds, you need sufficient capital, but, in order to raise capital, you need funds. And your home and personal assets only take you so far.

So what do you do? Many entrepreneurs and owners who would not qualify for traditional fund sources have turned to crowdfunding or crowdlending as an alternative. Rather than trying to persuade one source to provide a large amount, you persuade a large number of people to each donate or lend you small amounts that will collectively add up to the larger amount needed.

Ongoing businesses and budding startups have successfully used crowdfunding, for example, to help renovate a microbrewery kitchen and to help support a “disco dog” LED dog safety vest controlled via smartphone.

CT Tip: Be sure to consult your advisor about federal securities and tax aspects plus any state rules as well.

We’ve listed below some plus-and-minus aspects of crowdfunding as well as some helpful tips for a successful crowdfunding campaign.

Advantages of Crowdfunding

Running a crowdfunding campaign for your business could have benefits beyond financial gain. Some of the benefits crowdfunding include:

  • “Test run” a new product or idea. Gauging the response on crowdfunding platforms could be a great way to obtain valuable feedback at a very low cost.
  • CT Tip: Testing a new product via crowdfunding could also help inform the types of future customers who might be willing to purchase a new product at retail.
  • Help spread the word about your business. Supporters who help spread your message may reach audiences you otherwise would never reach, regardless of how many funds you actually raise.
    CT Tip: Even if the campaign is one of the many that does not reach the funding target, the process could provide valuable learnings about general outreach going forward.
  • Opportunity to raise needed funds where other sources may not exist. Some entrepreneurs turn to the crowd, so to speak, because other options are not available. A successful campaign could help fund a dream project or dream business that otherwise would not come to fruition.
    CT Tip: If you are considering a new business or line and may participate in crowd lending, consider doing “friends and family” loans via the crowd-site platform. This helps showcase all, not just some, of the support you have received from others and avoids having to “ask another favor again” if your campaign is not getting off the ground.

Disadvantages of Crowdfunding

As great as the benefits of crowdfunding can be, crowdfunding does have some disadvantages to keep in mind:

  • Time and Effort. Planning and launching a campaign, whether successful or not, takes time and effort.
  • Fees and Funding Thresholds. Typically, the crowdfunding platform will charge a percentage-based or other fee. Also, be sure to review the platform’s terms on what happens to any funds raised if a campaign does not reach its goal, as each differs.
  • “Tapping” the same audience too often. Even the most supportive of your friends, family and colleagues have their limits, so plan the timing of your campaign accordingly.

Tips for a Successful Campaign

After weighing your options, if you decide that crowdfunding is right for your business, here are some tips to help make your campaign a success:

  • Provide a Reason to Donate. Your campaign should have a purpose that others believe in. They should feel good about contributing to your broader goal and supporting your work. In addition, the graduated rewards you provide for various donated amounts should be well thought-out.
    CT Tip: A “key” aspect is including a video that engages and inspires others to support your goals and campaign.,?li?
  • Plan Ahead. Be sure to devote the necessary time and attention to pre-campaign planning and promotion, including outreach to press and to your “internal” press—relatives, colleagues and others who could help you spread the word about your campaign and build momentum once the clock starts ticking.
  • Follow-Up and Say Thank You. If you are one of the fortunate businesses to reach your funding goal, be sure to follow-up on campaign promises and to thank your donors, lenders and supporters. It helps your public relations and greatly improves your chances of a successful subsequent campaign.

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