Depending on the type of business, it can cost anywhere from $50,000 to $150,000 to start a small or moderate-sized business. If you are starting a business that requires a large staff and outsized equipment maintenance expenses, then startup costs can range between $1 million to $5 million. It's no surprise then that many entrepreneurs consider crowdfunding for business. However, this might not be your best option.
What Exactly Is Crowdfunding for a Business?
Crowdfunding is the online practice of raising funds for business or humanitarian purposes through social media networking—kind of like a digital age version of the old telethon. You can present your business idea, plan and budget justifications on crowdfunding headquarter sites like Kickstarter or GoFundMe.
You can then advertise your business plan on various social media sites, like Facebook, for example. Supporters can donate directly through your crowdfunding page. However, it is difficult to stand out when trying to crowdfund—there are about 200 crowdfunding sites like Kickstarter and GoFundMe in existence.
Crowdfunding by the Numbers
About $34 billion is raised annually through crowd raising. Over $17 billion is crowd-raised annually in the United States alone. Sound like good odds to you? Well, only about 50 percent of all crowdfunding campaigns are ever successful. Although some platforms do allow you to keep any amassed funds short of the goal, most of the time, any unsuccessful campaigns must return all funds.
Also, about 41 percent of all successful crowdfunding campaigns are for new business launches. That means you will be in a very competitive and closed field. You'll need to explain your campaign in a short, succinct way, with a promotional video, and in a way that appeals to people, who often have short attention spans, on social media sites. You might have as few as 3 to 7 seconds to convince someone to donate before they move on to something else.
Crowdfunding is a proven fundraising technique. No one contests that. Yet, if you are not up to date with the newest online technologies, the popularity of social media sites, crowdfunding best practices, and how people on social media gravitate to crowdfunding sites, you're taking a big gamble on your business dreams.
It's also a lot harder to gain the trust of people on social media now. A recent, heartwarming, good Samaritan story of a couple using GoFundme to help a homeless man down on his luck turned out to be a scam. A $400,000 scam. All of the donations will be returned, the scammers face decades in prison, and all crowdfunding campaigns from here on out will be scrutinized a lot more.
Get a Business Quick? Not So Fast
Sometimes, the old ways are better. Develop a solid business plan. Consult a financial advisor. Business managers and advisors can shop your business plan to businesses and investors who may invest in you, for a fee of course. It might be better to develop an organic, real-world business network than to roll the dice with online strangers.
If you have significant savings, a valuable home, or valuable materials, you can leverage these things against a traditional bank loan. The average interest rate for a business loan ranges from 4.8 percent to 5 percent, though this estimate varies from lender to lender.
Or, you can put your business dreams on hold for several years and save money the old-fashioned way. There is no shame in that. It just might be more practical. If you know what you are doing, go for crowdfunding. Just know that you are depending on dozens or hundreds of online strangers to completely fundraise your business dreams.