Studies have found that successful crowdfunded projects or businesses depend on two main drivers: the marketability of the product and a large number of backers. Having a sexy, marketable project or product allows for greater ease with outreach. Furthermore, it’s critical to have a large support base of friends, family, community members, and online followers. These people function not only as funders but also promoters. These are just a few essential characteristics of successful small businesses, among many other critical business development components. Equally as important as having a supportive network is the choice to fund a small business. Small business loans were the only option previous to the advent of the sharing economy, specifically crowdfunding.
Small business loans can come in many forms and from many different sources. In addition to several new programs being offered by traditional sources, there are several relatively new loan sources available, like peer-to-peer lending sites such as Kiva and Lending Club and crowdfunding websites.
For example, if a small business qualifies for a bank loan, that’s where it should seek funding. Banks simply have the cheapest money to loan because of their access to checking and savings deposits. This also gives them a great incentive to court business owners, who make a lot of those deposits. Specifically, community banks and credit unions are the best option for small business owners.
In very specific scenarios, personal savings can be a good option for small business owners needing access to cash. If savings are sitting around and not earning as much interest as they could from being loaned to one’s own business, it can be a good investment.
In addition to the attractiveness of the product and the level of support of the project, the cornerstone of crowdfunding success is high-risk tolerance. The structure of capital raising platforms like Kickstarter is extremely risky, as crowdfunding is an all-or-nothing endeavor. If a campaign fails to reach its fundraising target, no matter how close it is, company receives none of the crowdfunded capital.
Taking on loans may be a more attractive alternative as a small business due to its relative security, but they require more credibility from the company’s perspective. However, this type of loan is hard to come by, since small-business loans are only available from other lenders when the franchising has a strong track record. For small businesses, a strong track record is rare and hard to convince. With a business with low overhead costs, such as a consultancy, all one needs to start the business from home is a computer and an Internet connection. From there, business credit cards can provide all the capital one may need.
One small-town business in Langley, Washington serves as a case study for successful crowdfunding campaigns. Owner Graham Gori first recognized a need in the market for his authentic Italian restaurant. At a holiday bazaar of a farmers market, he prepared blue corn pozole and vegan pipian rojo, putting up a stand as a makeshift street vendor. People lined up for his unique ethnic food. Evidently, an apparent opening in the market is necessary for a successful crowdfunding campaign.
Furthermore, Gori exercised marketing practices that worked in tandem with the small-scale nature of his business. For one, he developed a promotional video that he shared with friends and family. While Gori took advantage of a cutting-edge funding platform and all the social-media tools at his disposal, he also used one of the world’s oldest marketing techniques: He put on a sandwich board and walked in a parade and at a school festival, passing out fliers. These old-school marketing techniques are particularly useful in smaller communities, where social media outreach might be too progressive.
More specifically, companies in business-to-business industries with invoices and low revenue may want to consider selling accounts receivable, a small-business financing technique known as “factoring”.
Despite of all the advantages and disadvantages of various financing methods, it’s important to explore every available option as one looks for small-business funding. Although the crowdfunding route isn’t easy, one may find success and blow past intended fundraising goals. Although Graham Gori’s campaign for his ethnic restaurant defied the odds, it was a nail biter. If Gori’s company is any indication, crowdfunding can serve as an exciting and successful way to fund a small business and generate buzz even before it opens its doors.