The Pros and Cons of Crowdfunding Your Business Start-up

Over the last few years, crowdfunding has been gaining real traction as a leading method of business funding. First and foremost in determining if it’s the right path for your start-up is to understand the basics of the different types on offer, which include the following: 

• Donation crowdfunding: This is where you appeal to members of the public to make monetary pledges that will help fund your business. In many cases, incentives or rewards will be offered in exchange, such as early access to goods, discounts, freebies, etc. 
• Equity crowdfunding: This sees you appeal to business types more than your average consumer, as in exchange for pledges, investors receive a small equity stake in the company itself. 
• Debt crowdfunding: This model closely resembles a traditional bank loan, in that investors will receive interest along with remuneration. However, it differs in that the investors will be more directly involved and invested in the future success of the business, rather than just blindly throwing money at it. 

Once you’ve decided which style of crowdfunding would be most appropriate, it’s crucial you weigh up the more specific pros and cons to make sure you launch your campaign feeling informed and prepared. 

Pros include: 

• Fast, direct access to finance without the lengthy meetings or confusing paperwork associated with banks and loan companies. 
• The ability to start building buzz around your business and to form a loyal customer base before you even launch. 
• ‘Free’ marketing, in that the campaign page itself and spreading of the word via social media instantly gets your name out there. 
• The chance to receive feedback and make tweaks early in the development process, ensuring that your product or service actually meets demands when time comes to officially launch it. 
• It’s a great way to monitor the level of public interest in your business, as the more backers you get on board, the more you know you’re on the right track. 

Cons include: 

• It’s only really suited to products or services that directly appeal to the public, and which can be simply and succinctly explained. Complex, niche campaigns are less likely to draw in mass appeal. 
• You may be limited in terms of the level of funds you can expect to raise. Goals set in the hundreds of thousands are more liable to fail, meaning it’s a method only realistically suited to smaller scale projects. 
• Campaigns are often operated along an ‘all-or-nothing’ approach, meaning that pledges aren’t released until you’ve reached the full extent of your financial goal, and failure to do so means you receive nothing. 
• It really dials up the pressure, as you’ll be bound to uphold any reward promises made to pledgers, and they will all be closely watching the progress of your business, expecting to see results sooner rather than later. 
• Unless you’ve secured relevant trademarks, posting your product ideas publicly could see others try to rip them off. 

As with any form of finance, crowdfunding clearly has both advantages and disadvantages, meaning it’s a case of evaluating the potential risk factor alongside that of other methods, and choosing the one that works best for your particular business and its needs. 

from Finance Girl http://www.financegirl.co.uk/the-pros-and-cons-of-crowdfunding-your-business-start-up/