Growing an SME is not easy. Even if you have the guts, the willpower, and the persistence, financial problems can easily harm, even sink your business. For years, many small-business owners relied on bank loans to fulfill their capital needs. However, bank loans are not always suitable for the financial needs of SMEs. If you need working capital in today’s market, crowdfunding can be the best alternative option for you. But what is crowdfunding, you ask?
What is Crowdfunding?
Crowdfunding is a way to raise money, awareness, and support for a project or a business from the people around you. It’s all about how you persuade each individual to give you a small donation or capital for your project or idea.
Crowdfunding allows people with great ideas but lack of financing to raise the money they need to turn their initiatives into reality. In return, the donors and lenders will get rewarded. Essentially, the public will back your idea with their money and the project owners (aka you) can ‘thank’ them with rewards that reflect the money donated. The form of reward depends on the type of crowdfunding.
Main Categories of Crowdfunding
There are 4 different types of crowdfunding that you should know before you choose the best one for your business. They are:
- Rewards-based – In this category, backers (or your investors) each contribute a small amount of money in exchange for a reward. The reward is often, but not always, the final product your project or business needs financing to create. Some businesses choose to gift small presents like a notebook or an umbrella with their company logo as their reward if an individual’s contribution is considered too small to warrant your final product. Typically, people will use an online platform to pitch their rewards-based crowdfunding project and collect capital.
- Donation-based – As the name suggests, a donor will donate a small amount of money to a project without expecting any material returns after the donations (think charitable donations!). Some project heads will express gratitude and recognition to the donors, maybe even consider small rewards. But usually this type of crowdfunding is non-profit and is utilized to raise money for charitable causes. Some examples include: building a water resource in an underprivileged dryland or campaigns for natural disaster victims.
- Equity-based – A lot of big money deals is seen in equity-based crowdfunding. When an investor backs a project or company with his capital, he will not receive a physical reward. Instead, he will get a small piece of equity in the company itself. Equity crowdfunding is commonly used to raise money to fund the launch or growth of a new company. Equity-based crowdfunding is similar to getting capital from angel investors or venture capitalists. In fact, new companies and startups can choose to raise money from both equity-based crowdfunding and venture capitalists.
- Peer-to-peer lending – Some call this crowdfunding form debt-based crowdfunding. Investors are also called lenders, and they will individually loan some money to a borrower via a peer-to-peer lending platform. Peer-to-peer lending is open to more than one investor as long as the target loan is filled. The peer-to-peer lending platform, as a go-between, will facilitate a borrower with their requested financing. The peer-to-peer lending business model tends to be most favorable to SMEs and other small businesses, as the process is fast, simple, accessible, and online based – SMEs often need quick capital. With a P2P loan, an SME can use the funds to grow its business. Meanwhile, an investor gets repayment plus interest over time.
Crowdfunding can be a big opportunity for your business, as it offers a faster, easier process for financing. Just pick a category that suits your needs most. Good luck!