Debt Crowdfunding vs. Equity Crowdfunding - Which Is Right for My Business?
Updated: Jan 11
When you first start looking into crowdfunding as an option for your small business, the options out there can be a bit overwhelming. Do you go the more traditional route with a reward or gift campaign through a platform like Kickstarter? What other options are out there?
There are other crowdfunding tools available to you than rewards crowdfunding - as of only the past five years, there’s another option - Regulation Crowdfunding. Debt Crowdfunding and Equity Crowdfunding both fall under this category. So, what does all this mean? Is one kind of crowdfunding better than the other for your business? Let’s find out.
Businesses from breweries like Abjuration Brewing Co. to yoga studios have benefited from debt crowdfunding.
Crowdfunding with an added boost: building community
Did you know that raising capital for your business with a Honeycomb Credit crowdfunded small business loan can improve your customer relationships, build wealth in your community, and grow your business? Find out more and see how you can start growing your business today.
What is Regulation Crowdfunding (Reg CF)?
Regulation Crowdfunding became legal in 2016 with the Jumpstart Our Business Startups (JOBS) Act. In a nutshell, the JOBS act made it possible for small businesses to access funding from their social network through an intermediary platform (like Honeycomb Credit).
Before the JOBS Act, only accredited investors could put money into a business - this means people who have a net worth of at least $1 million, or a net income of $200,000. That left a lot of people who wanted to invest out of the loop!
Today, anybody 18 years or older can invest in a Regulation Crowdfunding campaign, whether they’re accredited or not. There are some investment caps still, but it still makes investing more accessible to people with more modest incomes, or who are looking for vetted, fixed-income investment offerings.
Regulation Crowdfunding comes mostly in two different forms: equity crowdfunding and debt crowdfunding. Both of them allow small businesses to raise capital, but the terms are slightly different for both, and they have their pros and cons.
Equity crowdfunding occurs when a small business decides to offer up a certain amount of ownership (read: profits) to the public to fund a new venture. This ownership is then divided up into shares of certain amounts, which people can purchase and then they’ll be entitled to future profits!
Equity crowdfunding is really popular in the brewery and distillery industry, especially when funding huge (million-dollar-plus) moves. One famous example of a brewery chain that funds using equity crowdfunding is BrewDog, with their Equity for Punks Tomorrow campaign.*
However, as with any form of funding for small business, there are advantages and disadvantages to choosing equity crowdfunding.
Advantages of equity crowdfunding
So, although like when you seek out an angel investor or some other kind of venture capital you are offering equity in your business, with equity crowdfunding that doesn’t automatically translate to ownership.
If you find an investor for your small business, they might want to have a say in how things are run in your business. In an equity crowdfunding campaign, where there could be hundreds, if not thousands of people investing in the campaign, that kind of relationship would be impossible! Therefore, if you run an equity crowdfunding campaign, you would be able to retain ownership privileges of your business and run it how you want.
Disadvantages of equity crowdfunding
The main disadvantage of equity crowdfunding comes from how it’s set up. To be frank, you’re giving up on profits that you could be keeping for yourself, in exchange for some upfront capital for your business. If you want to make more profits, this is a pretty major downside to equity investing.
Equity crowdfunding is also more difficult for businesses that aren’t as established. If you’ve been around for less than a year, it might be difficult to convince investors of your long-term goals and your ability to achieve them. This is why it’s more preferable for businesses that have already been around a while and are making big moves.
Debt crowdfunding is taking out a loan from your crowd. Instead of an equity crowdfunding campaign where investors get shares, with a debt crowdfunding campaign investors get their principal payment back with interest. While equity crowdfunding is really better suited for major projects from established companies, debt crowdfunding can be used by small businesses at all stages of their business journey, and for projects of all sizes!
Also, with debt crowdfunding you aren’t giving up any profits or ownership whatsoever! Everything remains the same with your business, you call the shots and get to keep the profits you earn.
Advantages of debt crowdfunding
There are so many benefits to debt crowdfunding that go beyond just raising capital. Debt crowdfunding can give you a chance to better market your business (great if you’re just starting out), can strengthen your relationships with your customers and community, and can lead you to more revenue growth!
Small businesses that crowdfund through Honeycomb see on average a 60% increase in revenue year-over-year after they run a debt crowdfunding campaign. This is because one of the unique aspects of debt crowdfunding is that it turns your customers into brand advocates. Not only will customers who invest in you want to continue patronizing your business, they’ll shout your name from the rooftops because your success is their success.
These benefits make debt crowdfunding far more powerful than just a tool to get you the small business financing you need. It makes it a growth tool that can power your business beyond what it’s currently capable of.
Tom Glover, co-owner of Abjuration Brewing, told us, “Honeycomb enabled us to essentially time-travel forward on our five-year business plan.” With their campaign, Abjuration Brewing was able to buy new equipment to expand their small-batch brewing business.
Disadvantages of debt crowdfunding
The main disadvantage of debt crowdfunding is the same disadvantage for virtually any kind of crowdfunding - you need to put in time and energy to get it to work.
The old adage, “If you build it, they will come,” doesn’t necessarily apply here. If you’re crowdfunding, you need to be intentional about telling everyone you know about your campaign, otherwise you won’t reach the true potential of your crowdfunding goal.
Luckily, Honeycomb’s team of crowdfunding experts are skilled at giving you all the information and resources you need to be able to spread the word about your crowdfunding campaign. We also will market your campaign to our own following of investors interested in helping out small businesses with their investments!
This is why Honeycomb has an 83% success rate - compared to the industry average of 22%. Many other crowdfunders will just let you handle everything - instead, we see your campaign as a partnership where our goal is to help you help yourself to raise the most you possibly can!
“Honeycomb Credit had our best interest in mind and continually supported us with everything, from the emotional aspects of riding out a campaign to fine tuning and suggesting media and methods,” said Tom. from Abjuration Brewing
Fair Capital from Friends and Fans
Debt crowdfunding can allow you to raise money from your community - and keep the profits and ownership! Find out more about how crowdfunding with Honeycomb Credit can help you achieve your funding goals and grow your business in the process.
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*The author would like to disclose that she holds shares in the Equity for Punks Tomorrow campaign