Address: Ballysheedy, Gort, Galway                  Email: finance@smefinance.ie                          Phone: 085 197 5326

The COVID-19 pandemic has created a difficult and occasionally dire situation for small businesses.

According to a July U.S. Chamber of Commerce report, more than half of small businesses are still worried about having to permanently close in the coming months. Now, government-backed pandemic small business loan programs have expired and efforts to renew them have stalled. Where do small businesses in trouble go for financial help?

The Small Business Administration (SBA) still has loan products available, as do most traditional banks and even some online lenders. But another avenue to explore to help you bridge the financial gap is crowdfunding. 

Kickstarter research found that support for crowdfunding campaigns and the success rate of campaigns is consistent with pre-pandemic metrics. However, the number of live projects on Kickstarter is down about 25% from the same time last year. Meanwhile, the largest equity crowdfunding platform, Wefunder, just reported that investor volume was up 35% from February through April and, in early May, reported a record $2 million of investment on a single day.

Crowdfunding, it appears, is still going strong and backers are still eager to support their favorite projects or businesses. Right now, crowdfunding may save some of America’s struggling business.

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The Pros Of Crowdfunding During The Pandemic

Businesses generally use crowdfunding to launch new products, not sustain their business. Yet extreme times call for extreme measures, and many of the benefits of crowdfunding for product launches apply to crowdfunding for business capital.

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Right now, there are fewer financing options available to small businesses. Online lenders are still a bit wary, while government programs are stretched. Businesses struggling right now may be rightfully concerned about using credit cards without any assurance that business will improve enough to pay bills before accruing interest charges. 

Crowdfunding, however, has a number of enticing perks:

 

  • Build your market and network: Whether you’re launching a product or trying to stay in business, crowdfunding campaigns help you tap into new markets and build a network with like-minded people and businesses. If a loyal customer sees you’re raising money, they’re likely to tell their friends. If similar businesses who are also struggling see your campaign they may reach out to see how you two can work together.
  • Crowdfunding can accelerate your business: When you apply for a loan, you may only qualify for a certain amount of funding. When you crowdfund, you can set a goal and, if all goes well, you may exceed it. It’s unlikely, but if you greatly exceed your goals, you could accelerate the growth of your business.
  • You stay in the driver’s seat: When you crowdfund, funders contribute out of a sense of altruism and an appreciation of your product or service. Yes, you should incentivize them by offering gift certificates or special deals for different funding levels, but you’re not giving up equity or paying interest on a loan. (Note: If you’re doing equity crowdfunding, this does not apply as this form of crowdfunding trades equity for typically more substantial investment.)
  • Campaigns are centralized: With one campaign page on a platform like Kickstarter or Wefunder, you can easily manage outreach, lead generation, and fundraising in a single location.

 

As mentioned, there is less competition on crowdfunding platforms right now while people have shown the same interest in supporting projects. With less competition for the same amount of backers and dollars, that’s encouraging math for small businesses.

Kickstarter has also incentivized creators and businesses to use their platform during the pandemic by offering free seven-day extensions to many campaigns and new tools to promote projects on social media.

The Disadvantages Of Crowdfunding Right Now

While crowdfunding offers many advantages over traditional financing routes, its main disadvantage is simply that it’s hard.

To run a successful crowdfunding campaign, you need a great digital marketing strategy that will get traffic to your campaign’s page. Then, your page must be optimized to turn those visitors into backers. Many crowdfunding sites have also struggled to keep scammers or bots off of pages, so there is a risk of thinking you’ve met your goal, only to be tricked by fraud.

If your business is relatively unknown, or caters to a very local community, crowdfunding may not be the best option unless there are some very wealthy and generous individuals in that community. Nobody wants to work themselves to the bone only to fall short of a fundraising goal. Crowdfunding undeniably carries that risk.

Other logistical issues that arise through crowdfunding include:

 

  • Your crowdfunding funds are taxable: What you receive from a crowdfunding campaign is taxable and may be subject to fees, so the net from your project will be lower after taxes. On the other hand, many business loan payments may be written off come tax season. 
  • No credit building: Traditional credit products also carry the benefit of building credit for your business, which can be vital to getting approved for loans in the future. Crowdfunding will not build your credit.
  • Bait-and-switch possibilities: Finally, if you pursue equity crowdfunding, investors don’t have to front money to get a piece of your business. They’re only on the hook if your campaign meets its goal and even then, they are not legally bound to actually follow through on the investment. You may reach your goal only to discover that your investors are concerned about a shift in the market or already put their money elsewhere. 

 

How To Successfully Run A Crowdfunding Campaign

Running a crowdfunding campaign takes patience, persistence, and tenacity. It also takes some luck. You could ask a hundred people who ran successful campaigns how they did it, and you might get a hundred different answers. But there are some consistent messages. For instance, crowdfunding platform Indiegogo lists the following suggestions, among others, on their official Cheat Sheet:

 

  • Focus on Facebook and Instagram ads.
  • A/B test copy, design, and rewards early and often.
  • Engage with backers on social media.
  • Post regular project updates.
  • Make video content for your project.

 

Additionally, small businesses who use crowdfunding should focus on community. You’re literally asking your community for help, so leverage that connection as much as you can. People have struggled during the pandemic, and they understand that businesses are struggling too. Nobody wants to see businesses they love go under.

Engaging with backers on social media is a great start to working that connection, but you should also use the campaign to learn more about what customers want to see from your business, and think of creative ways to attract their attention with discounts, promotions, and special offers. Any crowdfunder knows you need to give people a good reason to fund your project; for many small businesses, that reason may simply be to secure its existence in the community.

Put simply: Be transparent with your community, be communicative with them, and make them feel like they’re saving your business. Because, through crowdfunding, they truly might be.

SME Finance

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