How Small Business Crowdfunding Can Grow Your Business - The Ultimate Guide

How Small Business Crowdfunding Works

Crowdfunding generally can be explained as using small amounts of money from a large number of people to finance a business or project. The concept isn’t new. If you’ve ever thrown money in a pot for a street performer or put cash in a donation bin for a charity, you’ve participated in crowdfunding.

Modern-day crowdfunding makes use of the internet to reach more potential supporters and make it easier for them to contribute. There are four common types of crowdfunding. Here’s a quick breakdown:

1. Donation crowdfunding.

This type of small business crowdfunding is often used for charitable causes, disaster relief, and even for individuals who may need money for medical bills or other financially draining events in their lives.

Money is donated with little or no expectation of repayment.

If the nature and purpose of your small business is altruistic and moves people emotionally, donation crowdfunding may be a viable option for you.

2. Reward crowdfunding.

You’re probably most familiar with this type of crowdfunding. It involves offering a reward to people in exchange for their money. Sometimes that can be the company’s product or service, especially if the small business crowdfunding effort is to develop that product or service.

It also could be something unrelated to your business, but seen as valuable nonetheless.

One of the more famous examples of reward crowdfunding occurred long before the dawn of the internet. In 1885, France sent the gift of the Statue of Liberty to the United States. Unfortunately, that gift did not include the pedestal.

To help raise the $250,000 needed, publisher Joseph Pulitzer appealed to his readers for donations. As thanks to those who contributed, Pulitzer published the name of each donor in his newspaper.

3. Equity crowdfunding.

This form of business crowdfunding gives donors ownership shares in your business. This can be more involved and complex than other crowdfunding approaches, as your business likely needs to meet certain requirements and file financial disclosures with the Securities and Exchange Commission (SEC).

4. Debt crowdfunding.

This is sometimes referred to as peer-to-peer (P2P) lending. With this type of crowdfunding, you’re borrowing small amounts of money from many people, which you pay back with interest within a set timeframe.

Because you’re borrowing money with debt crowdfunding, your credit score is important. It’s used to determine your eligibility and the interest rate you receive. For instance, the difference between a 650 credit score and a 750 credit score may be the difference between a 30% and a 10% interest rate, respectively.

5. The business of small business crowdfunding.

Nearly all crowdfunding happens through crowdfunding websites. Some of the most well-known include GoFundMe, Kickstarter, and Indiegogo. These platforms often charge fees for creating your account, as well as for each donation.

There also are differences about when you can access your money and in what amount(s). For example, with Kickstarter you must reach your stated fundraising goal or you receive none of the funds.

We’ll get into more of what you should know about choosing a crowdfunding platform in a bit.

How to Create a Crowdfunding Campaign

1. Choose your small business crowdfunding method.

Consider what type of business you have and whether reward crowdfunding or equity crowdfunding would be a better fit. Generally speaking, reward crowdfunding is less complicated than equity crowdfunding.

If you choose reward crowdfunding, think about what type of reward would be most appealing to potential backers. For example, if you’re starting a gourmet cookie baking business from home, maybe it’s a free bag of cookies each month for a year.

It’s also a good idea to offer different rewards based on the level of contribution, such as two bags of cookies each month, or free cookies for two years. You may even find that some potential supporters will offer suggestions about what might be an appropriate reward.

If you’re leaning toward equity crowdfunding, it’s important to know that you’ll likely be giving up partial ownership of your business to other people. On the plus side, it’s usually a small part of your business spread among many people.

While this still means you could be sharing profits, you likely won’t be surrendering a large chuck of control of your business to a single investor.

2. Determine your funding target.

Knowing how much to ask for is important for two reasons. One is making sure you have enough money to cover all or most of your startup costs.

Along with some of the basics, such as securing office or manufacturing space, remember marketing and sales costs too. If you’re offering rewards to donors, you’ll need to factor in the cost of those as well.

The second reason for carefully choosing your funding target is more about human nature than finance. Based on the first reason mentioned above, you might be thinking of a large amount, but that might not be the best approach.

According to crowdfunding site Indiegogo, contributors pay more attention to the funding percentage than the total funding amount.

Also, research at UCLA found that as you come closer to reaching your funding goal, you begin attracting more contributors. It’s a herding mentality that’s similar to more fans supporting a sports team that wins more games.

The research also points out that people see less risk investing in a business with close to 100% or more of their funding because it’s more likely the business will be able to move forward.

3. Know the rules.

Most crowdfunding sites have specific rules, and they often can vary from one to another. Checking out the rules can help you choose the best site for your small business crowdfunding project, and it can help ensure greater success.

There are a number of crowdfunding platforms you can choose from, but two of the most well-known for businesses are Kickstarter, and Indiegogo.

How you get your money.

A big difference to consider when looking at crowdfunding sites is how and when you get access to the money you’ve raised. For example, let’s take a look at Kickstarter and Indiegogo.

Kickstarter — This platform uses an “all-or-nothing” approach. You won’t get any money unless and until you reach your funding goal. This is another reason to give serious thought to your target amount.

Indiegogo — You can opt to receive funding as it comes in or wait to see if you reach your target. Indiegogo will send money to your bank account within 15 business days after your campaign ends.

For some business owners, having immediate access to your funds can be very helpful. On the other hand, having an all-or-nothing funding stance can be seen as less risky and may be more likely to attract more investors and contributors

What types of crowdfunding are allowed?

It’s also important to know how you can raise money on each site. For instance, neither Kickstarter nor Indiegogo allow for equity crowdfunding.

If you do want to pursue equity crowdfunding, you also should be aware of regulations from the SEC, in addition to those of the specific funding site.

Understand the cost structure.

While crowdfunding sites can help your business get started, it’s helpful to remember that each one is also a business. Much of their revenue comes in the form of fees. These usually are a percentage of the funds you raise and a percentage of each transaction.

The good news is that there is a wide range of crowdfunding sites to choose from. If one doesn’t fit your needs, there’s likely another one available. So it’s important to understand all the rules governing the site you plan to use.

We recommend carefully reading all the rules on the specific site, and you can get started with a brief overview of some of the rules on the most popular sites here.

How Business Insurance Can Contribute to Successful Crowdfunding

One of the first things you’ll likely notice when you visit a crowdfunding site is that there are numerous crowdfunding projects and businesses. While competition for backers is a reality, it’s also an opportunity.

A key concern for many investors is confidence and trust in the company they’re backing. Not surprisingly, they want to limit their risk.

A good way to establish trust with your backers is to let them know you have the right business insurance to help offset financial risk from the unexpected.

Good business insurance coverage often includes general liability and professional liability policies.

General liability insurance.

This coverage helps protect your business against claims by others for bodily injury, damage to property, or personal injury.

Those claims can be substantial, especially for a business that’s just getting started. In fact, the average claim for property damage or customer injury is a hefty $30,000.

For example, let’s say you’re using small business crowdfunding to produce a “smart” blanket that senses a user’s body temperature and automatically adjusts its warming level. An early prototype of the blanket accidentally burns one of your customers and they sue you for their medical costs.

With general liability insurance, you could be covered for the cost of the claim and any associated legal expenses, up to the limits of your policy.

General liability also can cover advertising injury, which often involves claims of stolen ideas, invasion of privacy, libel, slander, and copyright infringement in advertising and marketing.

Key to a successful crowdfunding campaign is the marketing effort you put behind it. Let’s say a post on one of your social media channels inaccurately claims that a competitor’s blanket is made from harmful materials. The competitor sues you for slander. Even if you win the court case, it could wind up costing you a lot of money.

Without general liability coverage, you'd likely have to dip into your company funds, or your own pocket, to pay those costs.

Professional liability insurance.

If your business offers a service, professional liability insurance can provide coverage against claims of negligence or even honest mistakes.

Imagine you used crowdfunding to start a cosmetology business. A moisturizer you used during a facial creates a severe allergic reaction for one of your customers and requires a trip to the hospital. Later, your customer sues you for the medical costs and emotional distress.

If you have professional liability insurance, you likely would be covered for the legal costs and medical bills, up to the limit of your policy.

Getting the coverage you need. Fast, easy, and affordably.

Reward funding. Equity funding. General liability. Professional liability. We get it. You’ve got a lot of decisions to make. We can help make some of them a lot easier.

We know a lot about insurance. We also know a lot about small businesses and the challenges they face. Having enough time in your day is a big one. Check out our online quote tool, and we can get you the coverage you need — often in just 10 minutes.

We work with the nation’s leading insurers, so we can find coverage that fits your budget.

We also can do all this over the phone with one of our licensed insurance agents. They’re here to help Monday through Friday from 8 a.m. to 8 p.m., ET by calling 844-654-7272.

Now It’s Time to Draw a Crowd

About 1,900 words ago at the beginning of this article, we mentioned that crowdfunding is not only a way to get startup cash for your business, it’s also a way to market your business.

Wait, marketing sounds complicated.

Sort of. It depends how you look at it. For instance, if you think of a hammer as an appendage-powered steel fastener impelling device, then hanging a picture can seem complicated too.

To simplify things, think about marketing your crowdfund campaign as telling the story behind your idea and why you’re looking to crowdfund it.

Remember, it’s not about convincing professional investors to write a big check. It’s more about getting a lot of everyday people (the crowd) excited enough about what you’re doing to give you a little bit of money (the funding).

Start with your story.

The author and speaker, Simon Sinek, believes that people don’t buy what you do (or make), but why you do it or make it.

What is it that gets you out of bed in the morning (and probably keeps you awake at night as well) to get your business off the ground?

Don’t start with the product or business itself. Go back a few steps and tap into what motivated you to want to create that product or business. That’s your “why.” Start your story with that, then talk about what you’re doing.

Write it down. Use as many words and as many pages as you need. Then make it as clear, succinct, and emotionally powerful as you can. Try to get it down to the name of your product or business and the value it offers.

Here are some examples for inspiration:

Lomi: Turn Waste To Compost With A Single ButtonFlow Hive: Honey on Tap Directly From Your BeehivePono Music — Where Your Soul Rediscovers Music

Your story can be your most valuable asset in a successful crowdfunding campaign. You can use it to create videos, social media posts, press releases, and pitches to media outlets.

Once you have your story, you can tell it to everyone you can, any way you can, and every chance you get. And that’s one way to draw a crowd to fund your dream.

We’re Just One of the Many Behind You

Crowdfunding is all about getting people behind you and your business. The donors, backers, and investors you attract are not only sources of funding — they can often become true advocates for your business.

They believe in what you’re doing enough to stake their money on you. Many of them also may be the ones most likely to share their enthusiasm with their own crowd of family and friends.

We understand the value of supporting small businesses too. If you’re pursuing your business dream, we’re here with insurance and small business resources to help you be one of those to make your great idea a reality.