Education

What are the main crowdfunding advantages and disadvantages?

11 Jul 2022

If you've got a business idea in the pipeline or are looking to launch a new project, you might consider funding it via a crowdfunding campaign. But first, why not take some time to understand the advantages and disadvantages?

What are the main crowdfunding advantages and disadvantages?

From fintech to food and drink, crowdfunding has become a popular alternative funding source in recent years, fueling innovation. 

Although accessible, crowdfunding can be time-consuming, and like any funding, it's essential to get to grips with the advantages and disadvantages. 

Crowdfunding comes in three main types:

  • Equity crowdfunding

     – this is when investors invest money in return for shares or small stakes in the business.

  • Debt crowdfunding

     is when the investors' investments are repaid (plus interest) by the business they've invested in.

  • Rewards crowdfunding

     – this is when a company raises money by inviting people to donate in return for a reward or gesture. 

Crowdfunding advantages

Firstly, crowdfunding doesn't usually involve lots of formal presentations and meetings. Instead, the focus is on the quality of your idea and how engaging your pitch is. 

Crowdfunding can also be a way to gain validation for your idea. What's more, investors' feedback can help you refine it – or save it – before taking it to market. Investors will want your idea to succeed, so they will likely promote it to their network. 

Investors might be future customers, too, so you're effectively building brand loyalty before your product or service even launches. 

You never know; you might end up reaching your target amount quickly: venture capitalists look at crowdfunding platforms for organisations they may want to invest in.

When it comes to crowdfunding (to a certain extent), you're in control: you decide which rewards to offer and how much equity to give away.

Crowdfunding disadvantages

Your application could be rejected. Be sure to check out the crowdfunding platform's rules and expectations before applying. If you're successful, you'll have to put in much work to build momentum before going "live". 

With so much competition, so your idea needs to stand out. Depending on your platform, you might not get any funds pledged if you don't reach your target. Remember that it could harm your reputation if you don't hit the mark. 

There's also a risk that someone might steal your idea – especially if you haven't patented or copyrighted it.

It's essential to do the maths. You might give away too much equity in your business or too many rewards if you don't. Platforms typically take a fee of 5% and 7.5% of funds raised, and there are other charges too.

Crowdfunding tips

1. Have a plan – it's essential to do your research: why not check out some successful (and not-so-successful) crowdfunding campaigns in your niche and learn from them? Work on your pitch and try not to undersell yourself. 

2. Get the timing right – consider whether now's a good time to raise capital. If you need more time to prepare, consider taking it. You want to be ready to spring into action if and when you receive the funds you're hoping for. 

3. Have a timeline – setting a timeline will help honour the pledges you make to investors. You'll also need a backup plan if you don't manage to raise enough funds. 

4. Pick a platform – decide which crowdfunding type you want and familiarise yourself with the media and rules. At Funding Options, we have lenders on our panel that provide P2P/Crowdfunding loans. You can start your journey with us today.

5. Make it compelling – why should people care about your idea, and how will it help solve the world's problems or change people's lives? Use storytelling to create an emotional connection and make people want to invest.

6. Get marketing – think about how you will promote your crowdfunding campaign to get it in front of more potential investors. Consider social media, demos, ads, events, podcasts…the list of media goes on!

7. Listen – when you get constructive feedback, listen and learn from it. Feedback can help you improve your idea, and differentiate between success and failure. 

Although there are benefits to crowdfunding, it isn't suitable for everyone. Fortunately, there are plenty of business funding types to choose from these days, from merchant cash advances to revolving credit facilities and many more besides. 

See what you could be eligible for today. 

Get crowdfunding

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Editorial Team

Editorial Team

Crowdfunding

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