Small business crowdfunding is different from other types of crowdfunding we cover here because this type of financing is usually used for ongoing operations and product or service development for an established, even if small, business. It is different from equity crowdfunding because no equity stake is given up, and is not start-up crowdfunding because the small business is already established. Small business crowdfunding is actually similar to peer-to-peer lending in that a specific need is funded by the crowd, and payback occurs over a specific amount of time. What distinguishes small business crowdfunding is the fact that it done through a specific pitch and for a specific purpose that is marketed to the crowd, where peer-to-peer lending may be more general in nature.
Why do we separate small business crowdfunding from the same funding that larger more established businesses may go for? First, small businesses often need funding more quickly and urgently as their initial funds are used up or, in a related way, because they find themselves growing more quickly than anticipated. Second, investors may be drawn to small businesses with potential in order to help them grow and to boost the roll out of a product or service that is new to the market. And finally, the relationship between small businesses and investors may feel closer and more personal, which is exactly which makes it ripe for crowdsourcing.
Ways Small Busienss Crowdfunding Can Be Used
Small business crowdfunding encompasses many forms of investing that interested parties can provide a business venture. Some of the ways small business crowdfunding can be used include:
- To develop a new service that will scale what is already being done. In this way the established small business can expand into new services without using what may be small profits or money that needs to be used for other operating purposes. Funding a new service can feel almost like a start-up to the investor – but the investor also has the security of knowing that the business has the experience and infrastructure to be successful.
- For expansion into a new geography, or expansion into a bigger footprint. This may also feel like funding a start-up, and in some cases the investors may have a stake of some sort in the geography being expanded to. They get the opportunity of being a part of something new but knowing and liking the product or service involved.
- To develop a new product or expand a product line. Just like when a new service is being rolled out, this option allows the business to conserve its capital and the investor to know that the business is established already.
- To hire new positions such as an expanded sales force. This may not be as exciting as some of the options but it holds great potential if the reason why new staff are needed is that the products or services the business offers are popular.
- To modify a product or service. The investors may feel that with a little modification the product or service will really take off, and thus this form of crowdfunding for small business can be quite popular.
- To update equipment including software. Another slightly less exciting possibility, this for of crowdfunding for business can be attractive because it also may have to do with a product or service being so successful that new infrastructure is needed
Small business crowdfunding involves making a pitch through a website that promotes these kinds of requests. It may merely involve investors getting a payback with interest, or there can be perks that the investors get related to that business. Often the investors get an inside first look at the changes or improvements that they are helping pay for. In the case of small charities and other nonprofits the payback may be less and some of the investment may actually be a charitable donation.
Small Business Crowdfunding from Employees or Friends
There is sometimes specific reason why a small business chooses crowdfunding and that has to do with the crowdfunding site being the middle man between people who already know each other and want someone to manage the transaction. For example, when friends or family are going to help fund a business venture they may want to have someone else manage the money and provide the structure behind the investment. Crowdfunding websites and platforms can be a great fit in these instances.
Small businesses might do their own internal crowdfunding campaigns where employees and other stakeholders become the investors. In these cases, like the above, the business and its investors may want a crowdfunding platform or website external to both groups handling the transaction and ensuring that all parties get what they were looking for. This kind of internal crowdfunding is popular with start-ups and small businesses where the company wants to give employees a stake and the motivation to help the company succeed.
Of course sometimes these croudsourcing campaigns can all be combined – a general external funding campaign, an internal funding campaign, and a more specific targeted crowdfunding campaign to existing stakeholders. It is very possible that the perks and rewards of each type may differ. For example, employees may already have access to the latest news and latest prototypes and therefore may want other rewards like free training, enhanced benefit packages, or even gift certificates and the like.
Mixed Small Business Crowdfunding
While crowdfunding for small business often differs from equity crowdsourcing, there can potentially be a mix in the payback agreement, where the investors do receive some degree of equity, maybe only in the new product, service, or geography. And while we differentiate this type of crowdsourcing from start-up crowdfunding there can be the same feel. As time goes on more investors will realize that despite the excitement and perhaps greater reward that can come with equity agreement, this type of investing can have less of the risk and a very solid reward profile as well. A lot more about the company and its management and the quality of its products or services can be known with small business crowdfunding.