Crowdfunding

Don’t Guess if Crowdfunding Can Help Your Small Business – Know

July 29, 2022September 26, 2021 by Guest Post

As a small business owner, you’ve probably heard of crowdfunding. You probably haven’t thought about how it could help your business. It depends on your industry and familiarity with technological trends.

I can’t say if it’s right for your business or not. Below, however, you’ll find some answers to the most commonly posted questions regarding crowdfunding for small businesses. Hopefully, this will help you decide if you want to do more research on the subject.

Think about the following:

You don’t want to be ignorant of something that could help your business, do you?
If others in your industry aren’t doing something then it’s not right for your business?
Why not ignore every technological trend that could impact your business?
What’s the biggest cost to adopting technological trends? Is it money or time?
How has adopting other technological trends worked out for you?

“Does Crowdfunding Need to Be Paid Back?” Types and Examples

Is crowdfunding good or bad?

Like anything, it’s not black and white. Crowdfunding has both good and bad elements.

Raising capital is hard and complicated. It takes a lot of time, effort, and dedication to be successful in this area. But if you want your business idea to come to life then you’ve got to do everything necessary!

There are many crowdfunding platforms out there and you can never be sure which one is right for your business. You can always apply to more than one (more on that below). Try not to get discouraged if there’s little interest in your first stab at crowdfunding. Just as it takes some salesmanship and marketing savvy to sell to your customers, the same will be needed here too.

Stick with reputable crowdfunding sites. If crowdfunding is unexplored territory, there’s no need to take unnecessary risks by dealing with disreputable or unproven platforms.

These are some well-respected crowdfunding sites (Source):

Kickstarter
Indiegogo
Crowd Supply

Crowdfunding is a good way to get the word out about your brand and it can help you find investors and customers. Crowdfunding could also speed up the product development process by committing you to specific deadlines.

The benefits of crowdfunding are numerous. From networking access with potential partners, getting feedback early before going into production, and being able to showcase ideas that might not otherwise meet investor criteria.

It also provides an avenue for testing demand outside traditional channels by gauging customer interest first-hand. This allows you to conduct valuable market research concurrently with your capital raising efforts.

“Where Can I Get Data for Market Research?” 6 Gov’t Sources

Crowdfunding can be humbling too. That’s one of the primary downsides.

There can be times when the feeling of rejection will make you feel discouraged. However, it’s important to just accept this and move forward. Waiting for your fundraising goals to be met might seem to take forever. Remember that patience is, sometimes, a virtue when running a small business.

How much money can you get from crowdfunding?

Crowdfunding is a type of funding that can help you get the funds you need to start and grow your business. It’s an amazing way to get your company off the ground and can be used to fund anything from movies and music projects to art and fashion. Most businesses will likely use crowdfunding for product development, however. Crowdfunding has become easier with websites like Kickstarter, Indiegogo, GoFundMe, and others.

What is crowdfunding?

Crowdfunding utilizes an online platform where people can pledge money to a project; generally for a reward in return. Crowdfunding allows you to gain exposure and raise funds to help start and grow your business.

How much money can you raise?

At some sites, like Kickstarter, there is no set limit for how much you can raise. Other sites have a limit or cap. Be sure to read the fine print and understand what to expect.

Many projects never get funded, so it’s important to keep expectations realistic. Also, be aware of the timeline. Your project may take a few weeks to a few months to raise the desired funds.

Risks and challenges of crowdfunding

Crowdfunding is an increasingly popular means of funding for small businesses. Although a good portion of the people who start a crowdfund fail, this is consistent with the other risks taken as a small business owner.

More than a few companies have already risen through crowdfunding. These companies are great examples of how the platform can help businesses that need funding.

9 Wildly Successful Crowdfunded Startups

Can you use multiple crowdfunding sites?

You can run more than one crowdfunding campaign at a time, but it’s not recommended. You could be juggling too many balls in the air if you do that. It can be difficult to find the time and energy to manage two or more crowdfunding campaigns along with your other obligations to your company.

You have a lot of commitments that need your attention, but it is not just about the workload. You may also receive inquiries related to the crowdfunding project. Be careful not to overcommit yourself.

Perhaps, the best way to use multiple sites for your business would be to start with one platform, then when your crowdfunding is over then you can start with another. Running back-to-back or concurrent campaigns can make you look a bit too desperate. Even worse, it might give the impression that you are trying to run some sort of scam. This is not the exposure you need when you’re trying to launch a new product or a new business.

“Does Crowdfunding Need to Be Paid Back?” Types and Examples

July 29, 2022December 1, 2020 by KCB

does crowdfunding need to be paid back featured

“Is crowdfunding considered income?” Yes. Reward-based, equity, and donation-based crowdfunding are generally going to be treated as income by taxing authorities. Debt and real estate crowdfunding, due to their unique nature, will most likely not be considered income. However, if crowdfunding is used for business purposes, expenses can be deducted against the income.

Source

Of course, none of this is tax advice. You should consult with a tax professional before starting a crowdfunding campaign.

Crowdfunding is fundraising in the age of social media. It is a rapidly growing means for businesses and individuals to raise money.

There is no such thing as a free lunch. Or, so they say. Donors who contribute to crowdfunding campaigns will typically expect to repaid tangibly or intangibly.

How many types of crowdfunding are there?

Generally speaking, there are five types of crowdfunding. Most of which need to be paid back in one manner or another.

Reward-based crowdfunding

Many entrepreneurs and startups will use this type of crowdfunding to raise funds for a given project or the organization as a whole.

Donors are paid back with rewards. Often, the rewards are proportionate to the amount contributed.

Frequently, the reward will be the product or service that the crowdfunding proceeds were raised for. In other words, if an entrepreneur has an idea for a new product, they can start a crowdfunding campaign and repay donors with free product once manufacturing begins.

Equity crowdfunding

This is like traditional equity financing for a small business. Except, instead of offering equity in the company to select investors, it’s offered to the public as a whole. This type of crowdfunding is not paid back directly. Rather, donors are repaid through the appreciation of their equity.

Equity crowdfunding is also known as investment crowdfunding or crowd-investing. Since the funds raised are for getting a company off the ground, a considerable amount is usually needed.

Every donor will receive partial ownership in the newly-created company. Of course, the amount of ownership depends on the amount contributed.

Equity crowdfunding enjoys many of the same advantages and disadvantages as traditional equity financing.

Debt crowdfunding

This type of crowdfunding is better known by another name – peer-to-peer (P2P) lending. Like all borrowed money, debt crowdfunding needs to be paid back – with interest.

Debt crowdfunding is often used by individuals and less so by businesses.

It is similar to traditional debt financing in many respects. Funds are paid back on the P2P platform. From there they are dispersed to the lenders/donors. Interest is charged on the borrowed funds and repayment is made on an installment basis.

For a small business, debt crowdfunding has many of the same pros and cons as traditional debt financing.

Real estate crowdfunding

Real estate crowdfunding connects investors with real estate opportunities. This allows investors to diversify and participate in real estate investments without actually obtaining financing and dealing with ownership.

Investors can also get away with contributing considerably less than they would if they were participating in a traditional, large-scale, real estate investment.

This type of crowdfunding is paid back to the investors by the orchestrator of the real estate deal. Payouts are typically made quarterly and are dependent on the revenue-generating performance of the real estate investment.

Donation-based crowdfunding

This type of crowdfunding is more related to charity or fundraising than business uses. As such, it does not need to be paid back with cash.

Donation-based crowdfunding is typically used to raise money for personal needs or community projects. Oftentimes, fundraisers will go viral when they are for an especially empathetic cause.

Raising money for people who need help with medical expenses, financial hardship, or things such as a community garden are examples of donation-based crowdfunding.

Is crowdfunding free money?

Even if the type of crowdfunding utilized does not require cash payback, contributors typically expect to see some sort of tangible return on the money they donated. That return could be as simple as seeing their donations contribute to some sort of net positive for society.

With all types of crowdfunding, there are fees withheld by the platform. This is how they earn their money and continue to serve as middlemen between donors and fundraisers.

Raising money through crowdfunding takes considerable effort. So, there is a cost beyond dollars and cents.

First of all, it is necessary to create a compelling story. A reason for your potential donors to contribute to your crowdfunding efforts. This is not to say that the story should be fabricated or embellished. Rather, it must be conveyed in such a way as to pull on potential donors’ heartstrings and purse strings.

The other challenge is the marketing of your campaign. Crowdfunding is a heavily-used and continually-growing medium for raising funds. If you want to meet your funding goals, you’re going to have to exert considerable effort to get your campaign in front of eyeballs. This effort can be your own, or you can hire help.

Finally, if you set up a donation-based or reward-based crowdfunding campaign, you need to be prepared to return that money if you can’t meet the goals you promised…

Paying back crowdfunding money

Generally speaking, there are two options when raising money via crowdfunding.

With the “all or nothing” option, if you don’t hit your target, then no money will be taken from your supporters. The crowdfunding money is paid back to them automatically.

Alternatively, with the “keep what you raise” option, you receive whatever has been donated. Less the platform’s fees, of course. If you’ve raised considerably less than you anticipated, then the scope of your project will probably have to be scaled down.

Source

Obviously, with the “keep what you raise” option, you would be required to pay back what you raised subject to the requirements of that particular type of crowdfunding.

If you don’t pay back your crowdfunding proceeds as outlined in the terms of service, then you could be compelled by the law to pay it back…

Crowdfunding examples

Crowdfunding can be good, bad, or ugly. One example each of successes, failures, and frauds are listed below

Good – Oculus Rift

Link

The Oculus Rift virtual reality headsets were the offspring of a 2012 crowdfunding campaign. At the time, the campaign raised $2.5 million dollars from 10,000 or so donors.

Two short years later, Oculus was purchased by Facebook for $2 billion. One hell of a return on investment.

Bad – Induratus

Link

Induratus might’ve been a good idea. But, the creator of this crowdfunding campaign either failed to create a compelling story or failed the market his campaign effectively.

Induratus’s crowdfunding campaign had a goal of nearly $5 million CAD. Unfortunately, it only managed to raise one single solitary CAD, as of 2015.

Ugly – Coolest Cooler

Link

In 2014, the creator of the Coolest Cooler ran a reward-based crowdfunding campaign that raised a whopping $13.2 million dollars.

Donors we’re promised coolers once manufacturing was set up. Unfortunately, production delays and other problems resulted in tens of thousands of donors getting stiffed. By 2017, Coolest Cooler had to settle with the Oregon Department of Justice.

Is crowdfunding considered income?

Crowdfunding can be a great way to get your startup off the ground. However, before you start a campaign be sure to educate yourself on the tax ramifications of your particular type of crowdfunding. Also, be sure to pick the type of crowdfunding that is right for your project or business.

Make sure to create a compelling story and have a marketing plan ready for your crowdfunding campaign. this will help ensure that your campaign is successful and meets the goals of your small business.

“How Can I Get a Loan to Start a Business With No Credit?”

July 29, 2022October 25, 2020 by KCB

no credit loan to start business featured

“Can I get an SBA loan with no credit?” Unfortunately, you cannot. But, there are other options available to start a business with no credit. Not every option is practical for every entrepreneur. Plus, each has its pros and cons. However, if you want to start a business and have no credit history, you should read further about your options.

To be clear, what follows is options for starting a business with no credit.

There are more options available for businesses that are already operating. Those are covered at the end of the post.

Here’s a summary of the options for getting a startup loan with no credit. Each is covered in more detail below.

“No-credit” loan option	Pros	Cons
Small business grants	Don’t require repayment	Limited availability
Microloans	Quick approval	Typically only available for “underprivileged” groups
Friends & family	Lenders who know you well	Potential to damage relationships
Get a co-signor	Can help establish credit	Co-signor is responsible if you don’t pay
Business credit cards	Easy to obtain	Need personal credit history
Crowdfunding	No repayment necessary	Typically only available for B2C businesses

Small Business Grants

Grants can come from anywhere, so requirements can vary widely. However, credit history is not typically a requirement.

Another benefit of grants, of course, is that they do not require repayment.

No credit history and no repayment? Sounds like a hell of a deal, right? Well, the catch is that grants are typically stringent in their requirements. Plus, there’s typically a lot of competition.

However, free money to start your business is a great thing. So, it doesn’t hurt to spend a little time researching grants that your business might be eligible for.

Microloans and Nonprofits

Microloans are exactly what they sound like. Small(ish) loans for businesses.

Microloans are often made by nonprofit organizations. Therefore, they are not as concerned with credit history or worthiness as a traditional financial institution.

So, what’s the catch? Microloans are typically only given to “disadvantaged” borrowers. Certain races, genders, etc. Therefore, if you’re a white male, you’re likely excluded from eligibility for most microloans.

Friends and Family

Friends and family are a potential source of financing to start your business if you have no credit history.

Friends and family know your character. Therefore, assuming your character is good, the chore is to convince them of the viability of your startup. To do this, you’ll need a good business plan.

Blood and money don’t mix. That’s how the saying goes. The reason is that it can damage relationships with your friends and family. That might be too high of a price to pay. So, move forward carefully.

Find a Cosigner

If your time horizon is long enough, you can build credit by taking out a loan and asking someone to cosign with you. A cosigner increases the likelihood of approval.

Consistent, on-time repayment of the loan will help build your credit. Solid credit history will help you get a loan to start a business – someday.

In fact, depending on the nature of your business, you could technically use a cosigner to get a loan to start your business right now.

For instance, if you are buying a piece of equipment, or vehicle, or some other asset that serves as the foundation of your business. Something that makes for good collateral. It’s possible, with a cosigner, that you could take out a loan for that equipment – and then be in business.

Business Credit Cards

I hesitated to include this option because I don’t want it to come off as deceptive. It’s splitting hairs and a matter of interpretation. It depends on whether you or your business, have no credit history.

You can fund your business with a business credit card. If your business has no credit history.

However, you will almost certainly need a personal credit history in order to get a business credit card.

Most crowdfunding isn’t a loan. But, it can be a different means to the same end.

Indiegogo, Kickstarter, and GoFundMe are examples of crowdfunding.

Generally, business-to-consumer (B2C) companies have more success with crowdfunding than business-to-business (B2B) with crowdfunding.

Typically, repayment isn’t required for crowdfunding. There are three types of crowdfunding that do not require repayment. These are:

Donation-based

Donation-based crowdfunding is where supporters give money without any expectation. Typically, this is reserved for people in need.

Therefore if you want to pursue this avenue, your business had better serve a critical need for society.

Equity-based

Equity-based crowdfunding is a situation where people who contribute to your company also become owners. Their expectation is to earn a return on their contribution. Just as a shareholder in a publicly traded company would.

Rewards-based

With rewards-based crowdfunding, you promise supporters a product or service in return for their contribution.

No-credit options for established businesses

Below, are some other frequently-cited options for getting a business loan with no credit. However, they are only going to be available for existing businesses. These are not loans you can get to start a business.

Nevertheless, I include them because they could be viable options for financing in the future, as your business grows.

PayPal Working Capital

As you might’ve guessed, this is only an option if you process payments via PayPal.

You must have a 90-day history with and a PayPal Business or Premier account. Additionally, you must process up to $20,000 annually through PayPal.

A PayPal Working Capital loan is paid back by PayPal taking a little bit of each subsequent sale that you make through PayPal.

Invoice factoring

Fundbox and Bluevine are examples of invoice factoring.

Invoice factoring is also known as factoring accounts receivable (AR). Invoice factoring is where you use your AR as collateral for a loan. So, obviously, you have to be in business, making sales, in order to have accounts receivable.

This is a costly option. But, it is an option that can help if your business is having cash flow problems.

https://youtu.be/SVml54HRAeA

How Can I Get A Loan To Start A Business Without Credit? (https://youtu.be/SVml54HRAeA)

Do You Have to Secure a Loan to Start a Business? Be Prepared

July 29, 2022October 23, 2020 by KCB

“Do you need to get a business loan for your startup?” No. But many startups will choose to secure a loan to start their business. Why? Primarily because most entrepreneurs don’t have the means to finance 100% of their startup. Also, equity financing is typically only available for high-growth businesses.

Debt vs equity financing for startups

Most startups need financial help from outside sources. These sources of financing fall into two general categories:

Debt
Equity

Debt financing

Debt is borrowed money that must be repaid according to an agreed-upon schedule and at an agreed-upon cost (interest rate).

One of the advantages of debt is that you don’t give up any ownership of your business. All the lender is concerned about is receiving regular repayment plus interest.

Once the loan is paid off the relationship with the lender ends.

Additionally, interest is tax-deductible. It is subtracted from operating profit before taxes are calculated.

Finally, debt repayment is predictable. It’s an easy expense to forecast.

That’s also one of the disadvantages, though. Debt is a fixed cost.

If the proceeds from debt aren’t used in a manner that earns a good return on investment (in terms of revenue or reduced costs) then that fixed expense drags the business down. Whether times are good or bad the cost of debt stays the same.

Another downside of debt for startup financing is that you may have to personally guarantee repayment of the loan with your own personal assets.

Equity financing

Equity is ownership of the business. Unless you give someone else equity in your business, you will always have 100% ownership.

If you finance with equity, you give up a certain percentage of ownership of your business. I.e. profits and sales proceeds.

Equity has its advantages.

For starters, you are not obligated to repay equity financing. The outside investor should understand that risk

One disadvantage of equity is that your investors may not agree with your business decisions. Since they are owners, you’ll have to take their opinions on managing the business into consideration.

Investors can be bought out, but that can be expensive.

Types of loans for startup businesses

Not all startup business loans are the same. If you decide to secure a loan to start your business, you have several options.

Equipment financing loans

Loans for startup businesses have strict standards that must be met. If you call the loan by a different name, those standards might loosen.

Equipment financing loans are for buying equipment, machinery, and other fixed assets.

The equipment you purchase serves as collateral for the loan. Repayment is typically made in installments.

Business credit cards

In addition to providing financing, business credit cards can establish credit for your business.

It’s likely that you will have to “cosign” with your business (personally guarantee) before getting a business credit card.

Business credit cards also, often, come with generous rewards programs.

SBA loans

The Small Business Administration doesn’t lend to your business directly. They guarantee the loan to incentivize the lender.

SBA loans are, typically, more “paperwork-intensive” than other options.

SBA loans can also be made for larger amounts than some other alternatives.

Microlender loans

Microlenders are non-profit organizations that provide debt financing to startups who might not qualify with traditional lenders.

These loans are typically “smaller” than those made by a traditional financial institution.

P2P loans or crowdfunding

Peer-to-peer loans, currently, are only made to individuals. Not businesses.

P2P loans are also, typically, small. But, approval and funding are quick.

Loan crowdfunding, unlike other types of crowdfunding (donation, exchange, and equity), requires payback. It’s not dissimilar to P2P loans.

Friends and family loans

Borrowing from a friend or family member might be easier. But, it can come with other complications.

Make sure the terms of the friend/family loan are clear.

Obtaining a startup business loan

If you’ve decided to secure a loan for your startup, these are, more or less, the steps you’ll follow to get funding:

1) Determine how much you’ll need to borrow

This can be determined by creating financial projections for your business.

Keep in mind the fixed assets you’ll need to launch.

Also, money that will need to be spent before operations commence.

Additionally, your small business will need cash-on-hand at launch

Work in an additional amount for unanticipated expenses you might incur before your business becomes self-sufficient.

2) Decide what type(s) of startup business loan you want

Review Types of loans for startup businesses, above, and choose one or more that suits your business’s needs.

3) Compare loan providers

Several different providers should be available for whatever type of loan you seek for your startup.

Compare costs, terms, credit requirements, collateral required, documentation, business requirements, and other variables between providers. A table with the providers in the left column and the variables along the top might help you compare.

Look up and compare reviews for providers, too.

	APR	Loan term	Credit req	Collat needed	Docs needed	Biz req	Reviews
Provider 1
Provider 2
Provider 3

4) Assemble the needed documentation

Every type of startup business loan will require at least some type of documentation.

Common types include a business plan, historical financial statements, personal & business bank statements, personal & business tax returns, legal documents (leases, contracts, etc). Be prepared to provide more documentation. This should get the ball rolling, though.

5) Complete the application process

Each type of startup business loan will have its own unique application process.

You can apply with more than one provider at a time. This could help you secure a loan quicker. Beware of the effect of multiple inquiries on your credit score, though.

What factors can get your startup business loan application declined?

Not every loan gets approved. In fact, a lot of startup business loan applications get declined. Don’t despair.

If you do get rejected for a loan try to get an authentic reason why. Rejection sucks. But, understanding your shortcomings can help make it clear what you need to work on.

Here are some areas to address, before you apply, to minimize your chances of rejection.

Low credit score

Lenders aren’t visionaries. They rely heavily on the mysterious algorithm known as a credit score.

If your (or your business’s) credit score is too low, you’ll be systematically dismissed. Work to get your credit score to the minimum needed for the type of loan you’re seeking.

Lack of credit history

This can affect your credit score.

If you have no credit history, then, in most lender’s eyes, you have bad credit.

Fortunately, it doesn’t take too long to build a credit history. If you do so with on-time payments, a lot of your credit issues should disappear.

A high-risk industry

Lenders want to minimize risks.

If they deem your industry (or business model) high-risk, they will likely decline your loan application. If they don’t understand your industry (or business model), they’ll probably deem it high-risk and decline your loan application.

If you find yourself in this position more thorough market research might help. Plus, you might search for a lender that specializes in your particular industry.

Character issues

A criminal history and/or a bad reputation can result in a declined loan application.

Conviction of a crime involving “moral turpitude” is likely an instant rejection. If you’re unsure, you can speak with a representative of the lender to gauge their stance on your crime.

Infamy as a particularly immoral person, even if not criminal, isn’t going to help your cause either. In instances like this, you’ll likely have to apply somewhere your reputation doesn’t proceed you.

Lack of collateral

Collateral lowers risk for lenders. If things go bad, they can sell the collateral and recoup some of their losses.

However, if you’re securing a startup loan to pay for things like labor, marketing, or research, then there is nothing tangible for them to sell if you default on the loan. Therefore, they’ll see the loan as riskier and the likelihood of your business getting declined increases.

Capacity to repay

Low margins, a poor location, and many other factors can make your financial projections suspect in a lender’s eyes.

Even if you can show that it is possible for you to pay back the loan, that possibility might be based on so many shaky assumptions that the risk is too high to make a startup loan to your small business.

A poor business plan

A well-researched and thought-out business plan sends a strong message. It shows that you have carefully considered the present and future environment of your startup.

Beyond that, if it’s done right, it also serves as a marketing tool for the funding your startup needs to be successful. Every section of your business plan should make a case for loaning your small business the money it needs.

Lack of quality advice

Business is complicated.

It could be that your business is a good credit risk, but, you’re just not able to convey that to lenders. If that’s the case, check with your local SCORE chapter. There may be volunteers with that organization that can help you put your best foot forward.

Giving up

You’ll get declined for every loan you don’t apply for. Rejection can be discouraging, but try to take a lesson from it and make improvements where needed. Don’t keep banging your head against a wall.

Also, if you’re going to pitch your business, show some enthusiasm. Business revolves around selling and your startup’s potential is the first thing you have to sell. If you’re not pumped about your startup’s potential, then go back to the drawing board and refine it until you are.

Do you need to get a business loan for your startup?

It technically isn’t necessary to secure a loan to start a business. But, if you want to start a business, there’s a pretty high likelihood that you’ll need one.

Understanding your options and the loan process will help you decide what kind of debt financing is right for you. It will also help you to be prepared and increase the chances of your approval.