What is crowdfunding, and does your business need it?

While traditional funding sources are one path to raising funds, crowdfunding is another way to get business capital. Crowdfunding campaigns involve seeking funds from family members, friends, neighbors, customers and other individuals with whom you have a relationship to collectively put money toward your business.

In one form or other, crowdfunding — or its close cousin, microfinancing — has been around for a long time. But the modern version of getting multiple small crowdfunders together has gathered momentum over the past decade and will continue to increase, with a projected annual growth of 18% through 2024. The popularity of crowdfunding has increased thanks to online platforms and social media that bring business owners and supporters together.

Running a crowdfunding campaign

Today's crowdfunding, also known as crowdsourcing, is used by small business owners to seek out small crowdfunders to help finance a new business or a new product or service. 

You start by selecting a crowdfunding platform and creating a business profile. You can set your funding goals Incentives could include a limited-edition version of your new product or an enhancement of your service. People find your profile online, often through social media, and invest their cash in your dream.

In addition to raising capital, the process of crowdfunding can introduce your business to potential new customers. These people will be even more interested in your success because they're crowdfunders, but they also may want what your business sells. 

What are the benefits of crowdfunding?

For small businesses, crowdfunding campaigns can offer some advantages over more traditional financing. These include:

• No worries about payback. While you want to deliver for your crowdfunders, the crowdfunding concept works more like a grant than a loan. On many crowdfunding platforms, you don't have to pay back money or pay interest.
• Easy way for business owners to get capital. Crowdfunding works well for startups and people new to business ventures who may be less likely to qualify for traditional funding. In fact, women tend to be more successful than men at using crowdfunding to fund business growth.
• Greater efficiency. You don't have to take the time to prepare an extensive business plan or forecast, and you don't need detailed financial statements. That leaves you time to perfect your crowdfunding campaign.
• Proof of concept. A crowdfunding campaign can give you valuable insights into the validity of your concept and the target customers for it. Plus, what's dubbed “social proof,” or the willingness of potential customers and crowdfunders to buy into your idea, can help you see when you've got a winner.
• Valuable advice. Crowdfunders may be people who are knowledgeable about your market and can give you important feedback. Even if you get negative input, you can use it to refine your concept before you've gone to the time and effort  of bringing a product or service to market.
• Increased exposure. The more people who learn about your crowdfunding campaign, the more successful you will be. Many small business owners create promotional campaigns just to highlight their profiles on popular crowdfunding platforms. In fact, crowdfunding can be a piece of your overall marketing strategy.

How can you crowdfund for your business?

Different types of crowdfunding offer opportunities for almost every type of business. Here are a few different crowdfunding approaches to consider:

• Equity based. This is the most like traditional crowdfunders financing, but on a smaller scale. You trade equity, or a small part of the business, in exchange for capital. Crowdfunders get a share of your profits or dividends.
• Rewards based. Crowdfunders get something special in return for giving you money. It might be a free product, a special version of the product or a bonus from the business. Games, art, music and small niche products are often successful using a rewards-based method of crowdfunding
• Donation based. Crowdfunders give you money based on a request or call to action. This works best with a product or service that benefits a cause or charity, but it can be used for small business growth if you make the right pitch.

Once you understand how crowdfunding works, you'll need to be serious about how you manage the money from your campaign and how you run your business. Meet with your local business banker to get more information and discover how a business bank account can help you stay on track. 

For informational/educational purposes only: The views expressed in this article may differ from those of other employees and departments of JPMorgan Chase & Co. Views and strategies described may not be appropriate for everyone and are not intended as specific advice/recommendation for any individual. Information has been obtained from sources believed to be reliable, but JPMorgan Chase & Co. or its affiliates and/or subsidiaries do not warrant its completeness or accuracy. You should carefully consider your needs and objectives before making any decisions and consult the appropriate professional(s). Outlooks and past performance are not guarantees of future results.

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