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Benefits and Drawbacks of Crowdfunding for Startup Businesses

A growing trend in raising funds for a business is something called crowdfunding. You may have heard about this idea before: asking friends, family, and even strangers to invest in a business idea or help raise funds for improvements, expansions, or other business expenses.

On paper, it seems easy. A business can start by signing up with a crowdfunding platform, list some information about the business, and simply watch the money roll in! Of course, there is much more to it than that. Even though crowdfunding efforts have been popular lately, it doesn’t mean they are always successful–or even a great idea–for all business ventures.

How Does Crowdfunding Work?

There are two main types of crowdfunding approaches: Rewards-based and equity crowdfunding. Rewards-based efforts provide incentives for investors to donate, such as samples of the products or advertising sponsorships. These efforts are a good way to raise money for your future endeavors without giving away equity in your company. They also help you build a network of supporters.

Equity crowdfunding, on the other hand, trades funds for a piece of the company. This strategy is similar to accepting an angel investor, only it takes one lump sum and divides it among many (sometimes hundreds or thousands) of investors.

Benefits and Drawbacks of Crowdfunding

Many businesses see the benefits of crowdfunding right away. It is an accessible strategy with many app options. Many of these apps regularly raise hundreds of thousands of dollars for companies, though seven-figure digits are not unheard of. It’s also much easier for companies to gather investors and manage them in an organized fashion.

Of course, there are drawbacks to crowdfunding, as well. There is a lot of pressure to provide a share in the new company–or, in the case of rewards-based approaches, whatever reward the company promises investors. Some apps also operate as a win/loss scenario. For example, if a company sets a goal to raise $100,000 but raises $99,000, the company gets nothing. Ultimately, that company may not lose any investment money per se, but they would have invested a lot of time and energy for no payout.

Equity crowdfunding also requires a large degree of transparency. Some entrepreneurs are not comfortable sharing their company goals and plans in such an upfront manner for any potential investor to see. More established investors might also see crowdfunding as an expensive solution. That is to say, giving a portion of the company away to anyone who would like to invest does not sit well with everyone. Some businesses might want to better understand the experience of an investor before agreeing to give them shares in their business venture.

Is it Right for Your Business?

While a trendy and widely-used startup option, crowdfunding might not be an option for every business. They are often a good solution for investing in new products or business expansions, but starting a new business requires much more than just cash.

More than anything, a business needs a good team in its corner. Falcon National Bank takes pride in being a partner to small businesses. Contact our business banking specialists to learn more about options that fit your business.

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