How Small Business Owners Are Using Crowdfunding to Their Advantage

Crowdfunding brings together businesses looking to raise capital with non-traditional investors.

As defined by Investopedia, “Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture.”

Nearly $17.2 billion is generated annually through crowdfunding in North America.

Crowdfunding is typically used for fundraising, startups looking to launch products, and companies who want to see what products consumers would actually pay for them to produce. Crowdfunding can be used for launching large-scale products, like the Oculus VR, or smaller-scale projects like helping people fund their new potato salad recipe.

In the world of small businesses, The Wall Street Journal recently reported that “Thousands of small businesses have launched GoFundMe campaigns across 19 countries. These businesses range from comic book shops to drive-in movie theaters and more.”

GoFundMe is just one of the popular crowdfunding websites that exist, along with Kickstarter and Indigogo.

There are several different ways that small businesses and startups are using crowdfunding platforms to help fund their businesses. Let’s break it down.

To expand and continue growing

Some small businesses use crowdfunding as a way to help expand their current offerings. They may have an existing product line and are interested in expanding into new products that require funding or infrastructure.

Or, they may have a high level of demand and not enough funding to fulfill their supply. Here is an example of one campaign looking to expand their farming infrastructure to continue their growth at local farmer’s markets through a GoFundMe campaign.

Small business owners may explore crowdfunding when they don’t qualify for traditional financing or loans, says Scott McIntyre.

When raising money through GoFundMe, the owners of the campaign only need to pay the 2.9% credit card processing fee from the site and can keep the rest of the donations. Thus, for small business owners, this can sometimes be a better deal than the bank.

Existing companies might also want to explore which new products would be a hit with customers before going into the prototyping phase and use crowdfunding as a way to gauge public interest.

Some are using it to get off the ground

Many startups or people with side hustles get their chance to launch through crowdfunding. For entrepreneurs with a great idea, but lack the necessary funds to get off the ground, crowdfunding is a viable option!

The Oculus VR headset, Pebble wearable Devices, and Bragi Wireless headphones are all examples of side projects that became million-dollar companies by launching a Kickstarter campaign.

Some are using it to stay afloat

In this WSJ article, the writer suggests that many small businesses that are strapped for cash are now using GoFundMe as a way to foot their bills and stay open.

In order to keep up with his lease payments, one small business owner, Peter Glassman created a GoFundMe with a $250,000 goal. His bookstore had received an outpouring of support and was able to remain open. Loyal customers of these local establishments are happy to support these businesses in order to see them stay alive within their communities.

In the same article, Jessica Walker, president, and chief executive of the Manhattan Chamber of Commerce, said “small and midlevel independent businesses are squeezed by rising rents, minimum-wage increases, and mandatory sick leave. Crowdfunding can help fill the gap.” It also gives business owners a boost of confidence and validation to keep going”.

The pros and cons

When it comes to the “pros,” Melissa Wylie from the Lending Tree says getting funding through crowdsourcing is faster than traditional funding (if your campaign is successful). You can also elicit direct feedback from your backers, and in effect, experience strong word-of-mouth marketing for your business.

In terms of the “cons,” Wylie says that it might be difficult to stand out among the crowd of campaigns. Additionally, if you can’t fulfill your campaign promises, you need to inform your backers that you’ve failed.

Nearly any business can create a GoFundMe campaign and collect donations as there are no eligibility requirements or sign-up fees. Once you set your fundraising goal, you can collect donations until you turn the donation option off or remove the campaign from the platform. Regardless of whether or not you meet your goals, GoFundMe will allow you to cash out whatever you raise.

According to Fundera crowdsourcing statistics, the crowdfunding market is projected to grow to $300 billion by 2030. How does your small business plan to get involved with this trend?