Your Best Options When Using Crowdfunding For Your Business

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Mar. 7 2023, Published 8:05 a.m. ET

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Access to capital has long been an issue for women entrepreneurs. As we noted here, 29% of women business owners don’t think they’ll ever have equal access to capital, according to the 2022 Women & Minority Business Owner Spotlight report from Bank of America. Part of the problem is that, according to a report from Fundera, women business owners are less likely to apply for business loans than men.

But entrepreneurial women seem to excel at one type of funding—crowdfunding. So let’s explore how crowdfunding works and your best options.

To date, Investopedia says entrepreneurs have raised over $34 billion worldwide via crowdfunding. Chances are you’re familiar with the more well-known crowdfunding sites like Kickstarter, GoFundMe, and Indiegogo. There are also crowdfunding platforms designed to serve specific groups of people, like IFundWomen and FundBlackFounders.

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What is crowdfunding?

Crowdfunding has disrupted the world of startup financing, creating new pools of capital for entrepreneurs. Instead of the single-lender model of the past, crowdfunding has made raising funds a collective online effort, giving money to new businesses and introducing them to potential future customers.

How does crowdfunding work?

According to Investopedia, after you register and create a profile on a crowdfunding site, you should create your own personal campaign or fundraising page where you tell the story of why you need the money and what you need it for. Then set a fundraising goal, and start raising money. Depending on the type of crowdfunding site you decide to use, you can start collecting the money within days. Some sites have 30-day campaigns (or longer). Upon registration, funds are deposited directly to the financial institution account you link to your fundraising account.

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Different Types Of Crowdfunding

Chris Dargie, a SCORE mentor and business attorney, told SCORE mentor Dennis L Swanson that there are right and wrong ways to crowdfund. First, he says you need to understand the different types of funding:

  • Rewards-based crowdfunding: backers are incentivized to give you money
  • Equity crowdfunding: in exchange for funds, you give away some equity
  • Peer-to-Peer lending: this is a loan you’re obligated to pay back

The Best Crowdfunding Platforms

Dargie says, “Don’t automatically select the platform you’re most familiar with. Each crowdfunding platform is set up to serve a different purpose and audience, so choose the one that fits best with your business type and goal.”

Investopedia names these the best crowdfunding platform of 2023:

Best Overall: Indiegogo

Best for Startups:SeedInvest Technology

Best for Nonprofits: Mightycause

Best for Investing:StartEngine

Best for Individuals:GoFundMe

Best for Creative Professionals:Patreon

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Fulfill your obligation to your lenders.

“Deceptive crowdfunding campaigns are quickly shut down and fined,” says Dargie, so “know the rules and play by them.” However, he warns, “As crowdfunding has grown, so has the attention of government consumer protection bureaus towards these platforms.”

The Don’ts Of Crowdfunding

Dargie and Swanson say there are several don’ts of crowdfunding you should pay attention to. Don’t:

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  • Overpromise: Delays in business are inevitable, especially for a startup. When you promise a product within a specific timeframe during a crowdfunding campaign, don’t overpromise. Instead, manage the expectations of your backers by keeping them in the loop as your business progresses, and set realistic timelines along the way.
  • Launch a crowdfunding campaign before you’ve formed an entity: You need to legally form your business entity before you begin your crowdfunding campaign.
  • Forget to pay taxes on funds raised: Rewards-based campaigns bring in cash typically viewed by the Internal Revenue Service (IRS) as taxable business income. Consult with your tax advisors before beginning a crowdfunding campaign.
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3 Tips For Smart Crowdfunding

Several years ago, Forbes talked to several experts who shared their still-relevant insights about women business owners and crowdfunding. Here are a few of those tips:

Be a great storyteller.

Donna De Carolis, the founding dean of the Close School of Entrepreneurship at Drexel University, one of the experts, says this is where women business owners can “have an edge. This is a platform to pour your heart out and talk about your product and your story and get to the emotion…that contributes to the power of women in crowdfunding.”

For example, sharing why you created your product or service can emotionally paint the picture of how big, painful or frustrating of a problem you’re solving. A great story inspires action.

Know your audience.

Sara Meister, another of the experts and a former employee at Indiegogo, says, “Entrepreneurs with successful campaigns often start a year before launch building [and] testing their audience, making sure their content resonates with their customers, so when they launch they are not just putting something out into the ether without really feeling it out.”

Brainstorm several content ideas you think will click with your audience. Then test and iterate. Once you discover what messaging works, you can use the best-performing content on your website and in your marketing.

Set a realistic goal and timetable.

Determine how much money you’ll need, including “anticipated taxes and fees,” and create a budget. Meister says a one-month campaign is generally best.

Before launching your campaign, look at similar types of products or services to yours on the crowdfunding platform you choose. Study their campaign length, fundraising goal, and the amount of money raised. This step could give you insight into what works and what doesn’t, giving you the chance to change your campaign before you go live.

Like most aspects of starting and running your business, you don’t have to do this alone. Find a SCORE mentor to work with you to create your crowdfunding campaign so you can launch your business as soon as possible.

This article was written by Rieva Lesonsky and originally appeared on Score.

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