The Pros and Cons of Crowdfunding to Raise Capital for Small Business
Although crowdfunding platforms have become popular, one should stay away from the thought that just about any product or service can be launched with success. Crowdfunding is certainly a great alternative to finance new ideas and ventures or fund existing ones, but it has its own pros and cons that must be kept in mind.
There are two major types of crowdfunding platforms: rewards based and equity based. The first one requires campaigners to offer incentives and rewards in the form of discounted sales, merchandise and other goodies in return for donations. Equity crowdfunding grants shares to donors.
Crowdfunding has opened new channels of funding and investment. Now it’s possible for a small business or innovator to launch their product or idea on a platform, and receive money to realize the product in the real world. This is a great way to ‘prefund’ a project. It is also a way to build a network or community around the product or business. The cost of starting a campaign is low, and the reach is good.
Once an idea or product is placed before the public, it is a good way to validate its strength. On the other hand, a failure to receive a positive response could dampen the prospects and motivation. There can be a great deal of time investment and effort to fulfill the promises of rewards. At some sites, not achieving the target results in forfeiting the amount collected. The interaction with the community too needs to be maintained once the target is achieved.
Crowdfunding is good for consumer goods and services, but is not so attractive for B2B ventures. As for equity crowdfunding, although experienced investors can be found on these platforms, and quite a large amount can be raised, there are issues with certain aspects, such as having to make company financials public. In addition, innovators and entrepreneurs may not want to share equity just to raise capital, when alternative finance options are available.
For other requirements, small businesses can explore their options by finding out how microloans work.
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