Q: I own a small plumbing business and have exhausted all the traditional forms of financing. I have heard a lot about crowdfunding but have no idea how to get started. Is this a viable option?
A: Crowdfunding has been used for everything from financing new products to the pressing and recording of CDs. And it works!
Essentially, it involves reaching out via the internet to as many people as possible and offering them products or shares in your company in exchange for their monetary support.
The process can be simple, but there may be a few hoops you need to jump through to get equity funding, which is direct financing for a small business.
The Financial Conduct Authority has instituted a few rules to protect investors. So-called peer-to-peer funding requires that you have capital invested in your business and you have steps in place to repay investors if your business fails. You will also need to accurately describe the risks involved in investing in your business.
Crowdfunding campaigns that involve donations or rewards are exempt from these rules.
Here are a few simple steps to get you started:
- You need to decide what type of funding you need. Essentially there are three ways to go: rewards-based, where you offer product or services to investors; equity-based, where you offer shares in your company; and credit based, where you're taking out a loan.
- Evaluate your business through the eyes of an investor. Why would anyone want to sink money into your business? List the pros and cons.
- How much capital do you need to keep your business running? Develop a detailed business plan showing how the money will be used.
- Create a video explaining your business. It may be wise to hire a videographer to do this. This is one area where you don't want to cut corners.
- Email everyone you know a link to your crowdfunding campaign and ask them to share it with as many people as they can. This is called crowdfunding for a reason. The more people you can get to your page, the higher the potential is for funding.
A few of the more popular websites offering crowdfunding services include Kickstarter, Indiegogo and GoFundMe, all of which will walk you through the process of setting up a funding page. There are also sites that specialize in equity funding, including AngelList, EarlyShares, CircleUp and Crowdfunder.
ABOUT THE WRITER
Bruce Freeman, an adjunct professor and co-author of "Birthing the Elephant" (Random House), is president of ProLine Communications.