Crowdfunding to start a business involves raising small amounts of money from a large group of people to help finance your venture. These individuals usually pledge a certain amount to your idea in return for a reward for their contribution.
In this post, we take you through the benefits and risks of crowdfunding for startups, and look at what you need to know to get started.
Types of crowdfunding for business
There are two types of crowdfunding available in Australia, and the type you use will depend on your project and goals. These types are:
1. Crowdfunding, where supporters receive a gift or product in exchange for their pledge. This is commonly used to fund projects or products, as well as crowdfunding for charity.
2. Crowd-sourced funding (CSF), either in the form of debt crowdfunding or crowdfunding for equity. With debt crowdfunding, you take a loan and pay it back. Meanwhile crowdfunding with equity means you offer a portion of your company in exchange for funds. This is commonly used to fund a new business venture.
Advantages of crowdfunding and CSF
Crowdfunding can be an attractive option if you want to fund your business without going through bank loans or venture capital firms. This is because:
- You can test the waters to see if your idea gets traction with the crowdfunding community.
- It helps you improve your product. Your supporters can provide you with essential feedback to make your concept stronger for the future.
Risks of crowdfunding and CSF
While crowdfunding startups is a great way to raise money, it can also be a risky endeavour. Some of the disadvantages of crowdfunding are:
You may not reach your campaign goals in time, and need to find alternative sources of funding within a short timeframe.
If you choose to go with a crowdfunding equity platform, you’re partially surrendering ownership to your company.
If you aren’t aware of the laws and frameworks for crowdfunding in Australia, you may accidentally breach the law.
Crowdfunding provides a short-term injection of cash, rather than sustained income to your business over time.
There are fees involved in crowdfunding, including payment processing charges and platform fees.