Crowdfund Loans for Small Businesses

Susan GuilloryUpdated November 1, 2021

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

If you’re thinking about applying for small business loans but haven’t found one that fits your specific needs, you might consider a crowdfunding loan. With a crowdfund loan, rather than going through a traditional bank to borrow capital, you invite anyone who’s interested in supporting your company to do so.Some crowdfunding options don’t even require you to pay back the money you raise!If you find that you aren’t eligible for other types of financing, perhaps because your business hasn’t been in operation very long or your credit scores are too low, a crowdfund loan could be the solution you’re seeking.

What Is Crowdfunding?

Crowdfunding became one of the most popular funding options for startups a few years ago. It empowers anyone who is interested in a product or brand to have a vested interest in its success, either by donating funds or becoming an investor through a crowdfunding business loan. (There are also crowdfunding personal loans.)There are several types of crowdfunding, including:

Reward-based. With reward-based crowdfunding, individuals contribute as little as $5 to a brand’s crowdfunding campaign in exchange for a token of appreciation, such as a shirt with the company’s logo on it or a sample product. That might not sound like a lot of money, but with dozens or even hundreds of contributors (some of whom will likely give more), you can quickly raise thousands of dollars.
Donation. This kind of crowdfunding allows people to donate without your being required to repay them or give them anything in return. Donation crowdfunding is often used for personal campaigns, such as to pay for a person’s medical bills, though businesses use this option as well.
Equity. This type of crowdfunding is a bit like getting money from a venture capitalist or angel investor. You don’t have to pay back the funds you get, but each investor gets a piece of equity in your business, often in the form of stock.
Debt. Also called loan crowdfunding, this variant lets you borrow money from interested parties just like you would from a bank, but there may be more strict criteria for you to qualify.

Is Crowdfunding Right for Your Business?

If you’ve tried getting a loan with bad credit and haven’t been successful or don’t want to pay the astronomical interest rates that you’re offered, you might want to crowdsource loan funds. Today’s financial landscape is changing, and you’re no longer limited to borrowing from a bank! Your business could grow thanks to the contributions of individuals who want to see your brand thrive.A crowdfund loan could help you:

Take a new product concept from idea to creation
Expand into a new market
Buy materials to create products
Serve more customers
Hire staff
Invest in marketing

The key before starting a crowdfunding campaign is to know exactly how you’ll use the funds and how quickly you’ll be able to pay them back. You’ll also need to have a plan for how you’ll market your campaign. It’s important to note that money doesn’t just fall from the sky with crowdfunding. You have to do the work to market the campaign so that many people will see it and want to invest in your business.

How Can You Crowdfund Business Loans?

Once you have a plan for how much you need to borrow, how you’ll use the funds, and how you’ll market the campaign, find the best crowdfunding website for your needs. Let’s look at options for each type of crowdfunding.

Reward-Based Campaigns

If you like the idea of raising funds that don’t have to be repaid and can provide some sort of incentive to your supporters, consider reward crowdfunding.Indiegogo is one option for reward-based crowdfunding, and the site has helped entrepreneurs raise over $1 billion. It can be a useful platform to introduce your brand to more people who might want to support your loan crowdfunding campaign.Kickstarter is another option for reward-based crowdfunding, and the site has helped more than 200,000 campaigns find funding.

Donor Campaigns

This category is typically more for individuals or non-profits. However, if your business has experienced a setback like a flood or even being negatively impacted by COVID-19, there may be crowdfunding options for you on sites like GoFundMe.

Equity Campaigns

If you like the idea of bringing on investors who can, in exchange for equity, connect you with industry contacts and help your business grow, equity crowdfunding could be a good fit.OurCrowd is an equity crowdfunding site that carefully vets companies before connecting them to venture capitalists and investors.StartEngine is another option that has successfully funded over 500 offerings.

Debt Campaigns

And finally, you can opt for a crowdfunded loan with companies like Kiva, which currently offers 0% loans to U.S.-based businesses.Yieldstreet is another option. This site offers a variety of loan options, including multi-asset class funds, short-term notes, and structured notes.

Pros and Cons of Small Business Loan Crowdsourcing

Before starting your campaign to crowdfund loan proceeds, know both the potential benefits and drawbacks.

Pros of Crowdfund Loans

Depending on the type of crowdfunding you choose, you may be able to access capital without having to repay it, which can help your business profit faster.And if you’ve had difficulty qualifying for other types of financing, you may find it easier to get a crowdfunded loan. Finally, having a campaign on a popular crowdfunding site can get you more exposure and could result in new customers.

Cons of Crowdfund Loans

Setting up a crowdfunding campaign is no guarantee that you’ll raise the money you need. It does require you to have a solid marketing campaign to ensure the maximum number of people see it and contribute to your campaign. You may need to hire a marketing consultant who’s an expert in crowdfunding to see success.Some crowdfunding sites have stipulations that, if you don’t raise the full amount you set as a goal, you won’t receive any funds at all. Read the fine print before proceeding.There are sometimes fees associated with crowdfunding campaigns, so know what those are before you sign up with a site.

Learn More About Lantern's Small Business Funding Options

Crowdfund loans are one option for small business financing, but you have many others, no matter what your credit situation or specific financing needs are. Investigating personal loans is one option.Whether you’re looking for typical small business loans, crowdfunding options, or alternative lending solutions, Lantern by SoFi can help. Fill out one simple form to get multiple offers from our lending partners.

Photo credit: iStock/Andrii YalanskyiThe tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0921187

About the Author

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.

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