With interest rates on the rise and banks implementing strict underwriting criteria, many small business owners are looking for creative ways to infuse cash into their companies. Whether it’s to start a new venture, hire and train staff, purchase equipment or expand to a new location, you need access to capital at a reasonable cost. The higher the interest rates, the less money you have to invest in marketing, production and other key business areas.
Enter Crowdfunding, Stage Right.
As an alternative to traditional lending, small businesses use crowdfunding to raise capital by appealing to a large number of people who each contribute a small amount of money. Just as important as raising capital is the marketing research and insight gained.
Crowdfunding is an opportunity for businesses to fine tune their messaging campaigns while educating funders about product features and benefits. A dialogue with the crowdfunding community could lead to innovative product ideas the company may decide to implement. In some cases, the campaign even generates new customers!
Let’s take a look at two successful crowdfunding campaigns launched by our very own RISBDC clients:
Crowdfunding Campaign #1: Nest Homeware
Matt was seeking $18,000 to complete the first production run of the stick pans in his kitchen and dining collection. 235 supporters pledged $35,530 (donations received were almost double what he requested!)
Read more about Matt’s successful crowdfunding campaign here.
Crowdfunding Campaign #2: Whalers Brewing Company
Josh, Wes and Andy also exceeded their goal of $12,000 when 194 backers donated $15,229 to help them purchase equipment for their new microbrewery in Wakefield.
The details of their successful crowdfunding campaign are here.
Pretty impressive, right?
Now, before you jump into planning your first or next crowdfunding campaign, here are some important notes to consider:
- Successful crowdfunding campaigns take a significant amount of time and energy upfront.
- Building relationships with traditional lenders is still very important.
- Each crowdfunding platform has it’s own rules and regulations, so be sure to look into the fine print so you understand the commitment.
Launching a crowdfunding campaign takes time. It is typically NOT the fastest path to cash for small businesses. It could take anywhere from three months to a full year to complete.
In preparation for your campaign, be sure to:
- Check that your mission and messaging is consistent across all channels.
- Establish and clearly state the goals for the campaign (especially the amount of funds needed and how those funds will be used).
- Develop your network and reach out to them *before* the campaign launches. Lining up support beforehand enables you to catch the interest of customers who have less familiarity and trust with the brand.
- Research appropriate crowdfunding platforms most compatible with the campaign.
We’ve posted about the elements of a successful crowdfunding campaign here.
Which is better? Crowdfunding or Traditional Lending
The answer is, “You need both.”
Companies that use crowdfunding must also have a relationship with a traditional lender. A community bank is important for maintaining a company’s checking account, processing payroll, and in some cases financing long term investments like real estate and equipment. We also recommend that our clients establish a line of credit with their bank in case cash flow challenges and other emergencies arise.
Yes, traditional lenders have strict requirements and you must prove that you’re worth the risk.
And yes, pulling together all of the financial documents and paperwork can be overwhelming.
While crowdfunding may be a great alternative in some cases, traditional lending is still necessary for most small businesses to reach their full potential.
We can help you navigate the murky waters of traditional lending. Register for a free counseling session today to learn how our small business consultants can support you to achieve your business dreams and goals.
The Rhode Island Small Business Development Center at the University of Rhode Island employs a dedicated, experienced, and knowledgeable staff of business counselors and administrators who can assist you in growing your business. Register now for free, confidential business advice from our advisors here—call (401) 874-7232 to schedule a counseling appointment or attend our free webinars.
