Small Business Considerations for Crowdfunding Startups

Crowdfunding has become one of the most popular ways of mobilizing capital for small enterprises in recent years. However, most entrepreneurs do not understand how to use these platforms to create viable businesses. This post attempts to demystify crowdfunding for aspiring entrepreneurs.

Pitching

Crowdfunding is most popular with millennials, so it is important that you sell a business idea that appeals to this demographic. Next, develop a viable business plan that is clear and authentic and make a compelling proposition. You will then have to create a reward mechanism that benefits investors who put money into the business. Offer good but realistic returns to your backers in the form of equity, discounts, interest, gifts, and participation in generating ideas or making important decisions.

Crowdfunding platforms

Conduct comprehensive research on the type of investors and fundraising methods available on each crowdfunding platform to determine the one that suits your type of business. Some websites only support benevolent social enterprises such as charities while others allow profitable businesses to raise funds.

Further, each platform has restrictions on the fundraising duration such that you may be unable to access funds if you do not reach the target when the period expires. All platforms impose charges on fundraisers to sustain operations. Take these factors into consideration when choosing a platform because you are risking your intellectual property in exchange for funds.

Tax considerations

Any income gained by an enterprise is subject to taxation. Therefore, entrepreneurs need to understand how to treat funds raised through crowdfunding to avoid problems with tax authorities. You can register it as credit, equity or donations in your accounts depending on the type of enterprise. For small businesses, it is preferable to treat it as debt or equity to reduce complications when filing tax returns.

Alternative finance

One of the problems that most crowdfundingstartups experience is the lack of sufficient capital and cash flow to keep their business going after the initial cash injection. Several forms of alternative finance are available to small businesses.

Venture capital

Venture capital is a form of business finance where the owner of a firm to raise funds by relinquishing equity to investors. It is a great way of increasing your capital base without burdening your enterprise with expensive debt. Its main drawback is that you could lose your business to an investor or lose control such that the investors make all the important managerial and investment decisions. It is not suitable for entrepreneurs who like to have a tight hold of their ventures.

Business loans

Another alternative to crowdfunding is borrowing funds that specifically target small businesses. Several financial institutions, government agencies, and non-profit organisations provide funding for small businesses. Conduct thorough research on the different sources to determine the one that suits your needs. You need to take into consideration factors such as the loan structure, interest rates, and other charges before settling on a financier.

Asset finance

Asset finance is a loan that you use to buy property such as machines and equipment to use while running the business. It is often easier to get than bank loans because the asset acts as the security saving you the need to find guarantors. Some manufacturers and retailers also provide assets on hire purchase, allowing businesses to acquire property through installments.

Bottom line

Crowdfunding has grown tremendously in recent years but most entrepreneurs lack the business acumen to turn it into a viable source of capital for a sustainable business. Aspiring entrepreneurs need to understand the process of setting up a crowdfunding startup and sources of alternative finance to sustain the venture. Armed with this information, they can turn crowdfunding ideas into successful enterprises.

Originally published at https://www.namasteui.com on March 26, 2020.