This is already the third episode of our Small Business Funding series. Earlier, we talked about equity and debt financing and how these financing sources can benefit SMEs- tell us, which type do you prefer?

Today, we wil highlight a specific part within financing: crowdfunding. Crowdfunding is being adopted by more and more countries the last years, and is becoming a serious alternative for traditional sources, as bank credits. Shortly, crowdfunding is a way of raising capital, whereby many people invest a small amount of money in a company or project.

In general there are four types of crowdfunding:

Debt-based crowdfunding, or P2P lending. The amount invested is a loan and so, should be paid back, plus additional interest.

Equity-based crowdfunding. This form is rapidly growing and implies basically that people invest in exchange for shares, so they become owners of the company too, and can somewhat influence management decisions- but because many people have a very small stake, the influence of one investor will not be big.

Donation- based crowdfunding. This form is mostly used for social and non-profit projects. As the name already suggests, people investments’ are donations and they don’t get anything back in return- expect for a ‘good feeling’.

Reward- based crowdfunding. The difference with donation-based crowdfunding is that investors get a non-financial return for their investment, for example the product itself and often some attractive extras or limited editions.

Why would SMEs use crowdfunding?

A common misconception of crowdfunding is that it is only for startups. Well, that is how it started, but nowadays, many SMEs are also using the crowd to finance their business.

Easier access to capital

As we all know, it is hard for SMEs and startups to obtain capital the traditional way, for example a bank loan. One of the advantages of crowdfunding is that you collect money from many people, instead of one institution as a bank or investment firm. The requirements to run a crowdfunding campaign are less strict than those of banks for example, and so crowdfunding gives many entrepreneurs access to capital.

However, you still need a very good proposition, as people invest their money and time in your project, and they require you have a solid business plan with ambitious but realistic goals.

Gain ambassadors

People who are willing to invest money- and time, in your company, have shown that they believe in you and your product. These people are particularly useful to generate more demand and increase the awareness of your business. If you engage them in your activities and update them when there are special developments, they will share your proposition with their network.

Crowdfunding across the continents

Here in The Netherlands, crowdfunding is booming. Crowdfunding consultancy bureau Douw&Koren expects crowdfunding to grow to €100M this year, and entrepreneurs have many platforms to choose from, dependent on their project and goal of the campaign.

But, do other countries experience similar developments?

Nope, definitely not. In Europe, the UK is by far the most developed when it comes to crowdfunding, and Belgium, Spain and Germany are expanding their crowdfunding opportunties as well.

At the other side of the ocean, in the US, reward- and donation-based platforms as Kickstarter and Indiegogo have become really big over the past few year. In 2012, the JOBS Act was passed- this act should enable non-accredited investors to invest. On October 30th 2015 the SEC issued proposed amendments to the existing crowdfunding rules.

Only success stories?

Almost everybody has heard of the Veronica Mars movie, Pebbles and Oculus Drift, all success stories. It might seem that raising funds through crowdfunding is a piece of cake. However, there are many stories of entrepreneurs that were less lucky- or better: less prepared, but these stories usually do not reach the news. Running and completing a crowdfunding campaign takes a lot of time and effort, and requires full dedication. Recently we’ve compiled some tips for you how to run a successful crowdfunding campaign, click here to learn more!

P.S. Equidam can help you prove your worth during your crowdfunding campaign. Register now and find out your valuation!