Looking to learn more about raising money for your busienss? Check out the Honeycomb Ultimate Guide to Getting a Small Business Loan
Crowdfunding is fantastic tool for businesses looking to raise money to fund their ideas and grow. There are currently dozens of options on the market, it can be a daunting task to pick the right one. How can a business sift through the noise to find the option that is right for them? There are several factors to consider when making the decision to crowdfund.
Gift Crowdfunding (aka Reward Crowdfunding)
Most business owners are likely familiar with this crowdfunding option. Companies like Kickstarter and Indiegogo have been around for years and are a fantastic option for individuals looking to get their ideas off the ground. In exchange for money, businesses commit to “pay back” donors in the form of gifts, pre-orders, or some other non-monetary perk.
Pros of gift crowdfunding:
Large, mature pool of donors eager to help great ideas
Limited cost (10% transaction fee + cost of investor repayment perks)
Very little paperwork
Cons of gift crowdfunding:
Not appropriate for established, revenue generating businesses
Very low chance of payback for donors
Higher expenses than many businesses anticipate with closing costs and prepaid product
Gift crowdfunding works best for:
Someone with an idea that is trying to build a company
Equity Crowdfunding
The implementation of Regulation CF in 2016 marked the beginning of equity crowdfunding. Businesses can more easily sell ownership of their company in exchange for cash from the public.
Pros of equity crowdfunding:
Gives early-stage businesses access to investment funds
Several reputable platform options
Aligns customers' incentives with the success of the business
Cons of equity crowdfunding:
Gives away ownership and control of the company to the crowd
Only works for pre-venture capital, ultra-high growth businesses
Considerable paperwork and ongoing disclosure requirements
Equity crowdfunding works best for:
High growth technology startups
Debt Crowdfunding
Similar to Equity Crowdfunding, debt crowdfunding became an option for small businesses in 2016 with the introduction of Reg CF. Much like a traditional bank loan, businesses borrow money in the near-term in exchange for the promise to pay that money back in the future plus some interest.
Pros of debt crowdfunding:
Businesses owners maintain full control/ownership of their business
Flexible terms and repayment options based on the business’s preferences
Limited ongoing disclosure requirements
Cons of debt crowdfunding:
Requires businesses to have revenue to pay back the loan
Debt crowdfunding works best for:
Christian Bilger is the COO of Honeycomb. Having witnessed the tremendous growth that financial innovation brought to mega-banks and hedge funds during his early career, Christian was determined to use these powers for good and help revitalize Main Street America. When not ensuring the smooth operation of Honeycomb’s well-oiled machinery, Christian tours and samples Pittsburgh’s many great breweries and restaurants with his wife, Alina.