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Crowdfunding is a rising force among today’s small business owners and entrepreneurs because it can enable access to funds that may have been previously out of reach. Instead of relying on investors or financial institutions, it allows you to tap into a grassroots support system. With rewards-based crowdfunding (also known as seed-based crowdfunding), entrepreneurs solicit financial donations from individuals in return for a product or service. It’s one of the most popular types of crowdfunding because it doesn't require giving up any equity in your company, or paying back any of the funds you raise. While crowdfunding for a small business can be a game changer, a successful rewards-based campaign can take a fair amount of time, hustle, and salesmanship. You’ll likely need to come up with a convincing pitch that appeals to as many people as possible, and offer attractive rewards at all donation levels. Could reward crowdfunding be a good fit for your business? Read on to find out.
What is Rewards-Based Crowdfunding?With reward crowdfunding, a company asks for money from the general public in exchange for a gift. Generally, companies provide tiers: the more money you give, the greater your reward.To launch a reward-based crowdfunding campaign, business owners generally need to describe their project or idea on a crowdfunding platform. They will also likely need to set a specific fundraising goal, choose an end date, and ask the crowd to contribute to their campaign for the promise of a reward.Crowdfunding rewards can be as basic as a personalized thank-you letter or branded T-shirt. The most popular crowdfunding gifts, however, often revolve around donors gaining early access to the product because they are actually receiving what excited them to fund your project in the first place. Reward crowdfunding differs from other types of crowdfunding. With equity crowdfunding, for example, companies give up a percentage of their company in exchange for funds. With loan crowdfunding, any money received is paid back with interest.
What Type of Business Is It Useful For?Rewards-based crowdfunding can be great for startups that don’t qualify for traditional small-business loans. It can also be a good choice for any small business that wants to test the waters on a new product or idea. Should a service or an aspect of your product need to be tweaked, user feedback from the crowdfunding process will likely quickly let you know. Reward crowdfunding might not be ideal, however, if your business has a complex product or service, since it may be hard to explain the value of your company in layman’s terms to a crowdfunding audience.RECOMMENDED: Small Business Grants: Free Money For Your Business
Who Can Donate to Your Crowdfunding Campaign?Anyone can donate to a reward-based crowdfunding campaign — family, friends, business associates, customers, or people entirely outside your network. Crowdfunding doesn’t require donors to have any special training, experience, or, in many instances, large amounts of money to donate. Often, business owners will share their campaign on social media, with the hope that their followers will, in turn, share the campaign with their networks.
What Platforms Can I Use for Crowdfunding?There are many reward-based crowdfunding platforms small businesses and entrepreneurs can explore. These include:
Each platform has its own rules, procedures, and fees. Platforms typically charge a percentage that can be as low as 4% to as high as 12% of funds raised, and may charge an additional processing fee.In many cases, companies won’t receive their money (and donors won’t get their rewards) unless funding targets are hit before the project's deadline.
- Funding Circle
- Lending Club
Researching Reward Ideas for CrowdfundingGenerally, the best rewards will excite your target audience no matter what tier they fall into, so it can be a good idea to provide multiple reward options. You may want to start by researching successful crowdfunding campaigns that offer products similar to yours. What sort of crowdfunding gifts did they offer? How many tiers did they provide? Ideally, you’ll want to find something that is both affordable for you and interesting to them. For example, if have an app you want to promote, you might consider providing the following rewards:
- $1: Thank you email with a special sneak peek video of the progress your team has been making.
- $5: Thank you postcard and weekly emails providing updates.
- $10: T-shirt and weekly emails providing updates.
- $15 : Early access to app.
- $20: T-shirt and early access to app.
- $50: Honorary mention within app and early access.
- $75: T-shirt, early access, and honorary mention.
What Are the Pros and Cons of Rewards Crowdfunding?All fund-raising strategies come with a unique set of benefits and drawbacks. Here are some of the pros and cons of reward-based crowdfunding.
|Not giving up any equity in your company||Launching and promoting the campaign can be time-consuming|
|Not taking any on any debt (aside from the reward)||Can be difficult to raise large amounts of money|
|Creating brand awareness and excitement||Money raised could be lost if you do not reach your target goal|
|No collateral is needed||Competitors may see your idea and start implementing it themselves if you do not protect it with a patent|
ProsOne of the biggest advantages to reward-based crowdfunding is that you are not giving up a portion of your company, nor are you taking on any debt. All you’re doing is offering perks to donors for giving you donations. Unlike applying for many small business loans, a crowdfunding campaign does not require you to pass a credit check or meet eligibility requirements. Reward-based crowdfunding can be a good funding option for a startup because of the exposure you can gain on the platform. This can help establish your customer base and build brand awareness. If donors get really excited about your product, they may do a lot of your marketing for you by talking about it on social media. When this happens, not only are you generating money, but you’re also getting free advertisingReward crowdfunding can also enable you to get consumer feedback during the early stages of product development to help you make it as good as it can be.
ConsOne major drawback to running a rewards-based crowdfunding campaign is the amount of time and effort you may have to put into it. Entrepreneurs typically need to create a persuasive campaign, which may include producing promotional videos, in order to help get backers interested in the project. They will likely also need to continuously promote their product. If you don’t reach your fund-raising goal, all of the money you raised may be given back to the donors, leaving you with no return for your efforts.Another potential drawback to reward crowdfunding is that it can allow competitors to see and steal your idea. Patents can protect you, but they, too, can take time and money. Unfortunately, successful crowdfunds can sometimes lead to cheap knock-offs. RECOMMENDED: Small Business Loans for Startups
The TakeawayReward-based crowdfunding is a form of crowdfunding where the creators of a new product, service, or business solicit a large number of people (the “crowd”) for capital in exchange for the promise of a reward. In many cases, these rewards are the product or service that the campaign was created to fund.Reward crowdfunding can help you raise money — as well generate excitement — for your product or service. However, it can take a fair amount of effort to execute a successful campaign, and you may not be able to raise as much money as you might need to launch or grow your business.Whether you decide to try your hand at rewards-based crowdfunding or not, you may want to check out other financing options as well. With Lantern by SoFi, you can explore options from multiple lenders without any type of commitment.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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About the Author
Lauren WardLauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.