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The Ins and Outs of Crowdfunding
What you need to know to crowdfund your business

Crowdfunding has become a popular means for raising funds for businesses over the past several years. With everything from board games to smartwatches gathering record-breaking support, small businesses from divers industries have gotten off the ground with the help of crowdfunding platforms. If your startup idea needs a boost or your new product needs a jumpstart, crowdfunding just might be a viable option for you.

Know your options

There are essentially two roads you can take when choosing to crowdfund a business venture: equity or rewards-based crowdfunding. Though Zack Miller of The Balance Small Business notes that equity crowdfunding is the smallest type of crowdfunding, it works for small businesses by providing a means for investors to come on board without you having to seek out angel investors the traditional way. Rebecca Lake of Investopedia considers the ability to post your business pitch in one easy-to-find place an advantage over seeking angel investment, also noting that a successful campaign that generates money will essentially market itself to additional investors.

Rewards-based crowdfunding is the more conventional method, popularized by platforms like Kickstarter and IndieGoGo, and works best if you have a product to sell. Through rewards-based crowdfunding, people are incentivized to pledge in order to receive a product or products of their choice. Offering different rewards across several tiers, including merchandise or exclusive access and experiences, encourages higher contributions.

Other crowdfunding methods include peer-to-peer lending and donation-based crowdfunding, which are particularly helpful for covering debt, though these approaches are likely best used to supplement funds acquired through traditional channels. You can also consider real estate crowdfunding through platforms like RealtyMogul and CrowdStreet for obtaining property.

Start with a story

When seeking crowdfunding, you will need to differentiate yourself from other businesses and products on the market. Even if your product is unique or your goal is distinctive, a well-delivered story is key to your campaign’s success. Entrepreneur’s John Boitnott recommends putting together a video for your campaign page. This will deliver your story and your vision in a clear, dynamic fashion that will resonate with investors more than text and photos. Boitnott also recommends doing the legwork in terms of promoting your campaign through social media, by volunteering for guest blog opportunities and contacting the media to get your story out there.

It’s also important that you understand the audience that will be receiving your story. Jonathan Ely, writing for Medium, says that messaging and targeting is essential for a successful crowdfunding campaign because your reach has the potential to be so much larger than a traditional pitch. You will want to have a firm grasp on what your business is, what its goals are, why it’s better than any alternatives on the market and who you expect to come aboard with you on your journey.

While crowdfunding is a great option if you have a splashy pitch or an innovative product, it may not be as fruitful for your small business as conventional routes like angel investment and established financial institutions. A measured approach may combine multiple sources of income, so consider crowdfunding at least as a possible supplement to your startup funds.

Published by East Boston Savings Bank
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All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.  

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