What is Crowdfunding?

what is crowdfunding

Crowdfunding campaigns raise funds for businesses Through individual small contributions from a big pool of contributors.

There are three types of crowdfunding:

  • Crowdfunding With Equity –  Investors get shares or profits.
  • Rewards/Donation-based crowdfunding – Money comes in through donations. There’s a rewards program, Usually a product or service.
  • Debt Crowdfunding – Early-stage companies attract investors who charge high-interest rates for business loans and the amounts are small.

This system works well for real estate investing as investors commit lower donations or capital towards any single property. It’s a great way to diversify your stock market portfolio. You just need to lock in the money for several years.

This is good for developers too. It allows them to get a big variety of investors. These developers can go to social media networks to get donations. Take note. A change in the 2012 Jobs Act provides more access to the US real estate market and crowdfunding.

Even though you can invest smaller amounts, most sites want you to be an accredited investor.

How Crowdfunding Works

The successful crowdfunding campaign raises small amounts of money from a large number of people. This is different from a traditional business loan. There’s a perception that working with a crowdfunding program to raise money is easy. But a successful campaign takes time and effort.

Here’s how crowdfunding works.

  • You need to create a profile regardless of the crowdfunding site you use. Graphics and product images help to raise money. Most involve a pitch video and some supporting content.
  • There is usually a subscription fee to fund projects. A payment processing fee can cost 2.9% and o.30 for each transaction. Along with the transaction fees, platform fees range from 3 to 5 percent.
  • Setting a goal for raising funds is essential. Some crowdfunding platforms will let you collect money even if your goals fall short, but others won’t. So small business owners need to be realistic.

Small businesses need to consider their annual sales before they come up with the gross campaign sales number. Getting some investment advice is helpful. It can dictate the point where you should stop raising money to ensure success.

  • Corralling backers before your crowdfunding projects launch is important. And it involves marketing your business venture. Successfully funded campaigns send consistent updates through email and social media.
  • You can collect funds from the most successful campaigns. The reward of crowdfunding shows successfully processed payments into your account. A crowdfunding equity platform has you work with investors to close the deal. Here’s some more information about the payout fees for GoFundMe.

Tips for Successful Crowdfunding Campaigns

Crowdfunding for business is a great way to get a startup going. Here are five tips to get you started, and remember there are legal requirements with each of these.

Start With a Community

If you want to use a platform, building a community is a good start. Reach out to members of the media and influencers to build momentum. This tip works for all types of crowdfunding. However, you need to remember that this is a numbers game. You want to be strategic about who you reach out to. However, at the same time, you don’t want to limit your options or narrow them down.

Offer Good Incentives

Offering hats and caps or T-shirts as incentives encourage donors to give more. Different tiers for a crowdfunding venture give people a way to remember your campaigns. Media shout-outs can influence what the average patron pays.

Keeping things simple is good. Having multiple bundles and additional accessories might not work out well.

You Need Good Copy

Cookie-cutter taglines can affect your campaign promotions. If peer-to-peer lending sentences aren’t unique, you won’t generate interest. Personalize your communications by adding your accomplishments. Media asset creation should be a priority.

You can also tell your personal business story. However, you’ll need to keep that short.

Don’t Ignore Analytics

Crowdfunding campaigns do better when you know what to change and when. Analytics can show you the traffic you get and the money coming in. Being specific about how you will use the money also helps.

Update Your Page

Pages with updated photos and written content are always appealing. Donors want to know the progress of your event or project.

Keep all posts engaging and short. It’s always a good idea to include videos and the most recent images.

4 Crowdfunding Platform Types for Your Startup

Maybe you’re looking for angel investors for an equity program, or something more low-key. Either way, here’s a list of the most common types of business crowdfunding.

Equity CrowdFunding

Equity crowdfunding lets groups of investors fund businesses and startups. They get equity for supplying cash. Equity-based crowdfunding is different and unique from other types of funding. The business plan here targets a larger group of investors.

Here’s a list of some equity crowdfunding sites.

Debt Crowdfunding

Investors supply the capital upfront. They get the money back plus interest.

Donation Crowdfunding

Get a large number of people to donate small amounts. There are no promises made to investors to repay or revenue-sharing deals made.

Reward-Based Crowdfunding

Startups don’t need to give up shares, or equity. Rewards are centered around the services or products for sale.

Top Crowdfunding Sites for Raising Money

Crowdfunding for small businesses means sorting through crowdfunding sites, like the ones that are listed here. Make sure to look for the best features such as marketing tools, user-friendliness and customer support. The ones listed below supply proven results for crowdfunding campaigns.


This is one of the reward-based crowdfunding leaders. Keep in mind you can raise capital here but Kick starter doesn’t fund charitable causes or personal expenses. It’s a leader as far as crowdfunding websites go because it offers Google Analytics integration.


This site is a crowdfunding success at least partially because of its flexibility. Get small business funds raised here with an easy and fast setup. Plus there’s social media integration and no deadlines or goals to get your funding.


This ranks as one of the best crowdfunding sites for early-stage tech startups. Investors get rewards for contributions. Plus, this site is available to both high net worth and non-high network investors. There’s a company-wide minimum of $100.


This crowd funding site is a little different. It’s made for charities and individuals with no startup fees involved. The payment partner does take a $.30 per transaction fee for credit card processing.


This is crowdfunding for science projects and experiments. Payment processing fees here are roughly 3 to 5% and each submitted project is reviewed before it’s launched. Here’s some more information on how this crowdfunding site works.

Keep in mind that you don’t need to reach your funding target crowdfunding campaign here. There’s no cost if you don’t because no one gets charged. Projects are excepted from Australia, Canada the UK, and the US.

As a creator, you never give up ownership. Any project that you create is always yours.


This is a site that deals with socially conscious type projects. Social enterprises, not for profits and community groups are the focus. There are some common campaigns here including funding for social programs or products. Organizations or individuals looking for money for other things like animal vet bills can use this site.

Any crowdfunding campaign here don’t charge fees to those running the campaign itself. The donors pay the payment processing fees which work out to about three dollars on every $100 donation. And if you are so inclined, you can offer to tip Chuffed.


This is a good equity crowdfunding site for seed-stage companies. They don’t charge a percentage of what you raise, but they only allow accredited investors. That’s partially defined as people with incomes of $200,000 and $300,000 over the last two years.

This isn’t the place for you if you’re looking to raise money for personal issues or causes. These accredited investors also include investment advisers and registered brokers. There’s no percentage fee for the amount you raise. However, you’ll need to pay at least $299 monthly to use the platform. This type of monthly fee needs to be considered.

Fledgling companies need to look for features like convertible note funding. This is used when pre-money valuation hasn’t been carried out which can be converted to equity.

What is a Disadvantage of Crowdfunding?

There are administrative fees and other issues to consider. For example, some of these sites can take up to a 5% cut and there are other fees that can include payment processing of 3 to 5%.

Think about this before you get involved. Some of the sites like the one just listed above include monthly payments for subscriptions. Considering all the costs means understanding when you can get access to the funds. Some sites make you wait before you can get your hands on the money. That could be anywhere between 60 to 90 days.

Don’t forget there can be other success fees like legal reimbursement expenses. These can take 60 days to show up and they can be an extra 7.5% extra on a campaign from an equity crowdfunding platform.

Image: Envato Elements

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Rob Starr Rob Starr is a staff writer for Small Business Trends. Rob is a freelance journalist and content strategist/manager with three decades of experience in both print and online writing. He currently works in New York City as a copywriter and all across North America for a variety of editing and writing enterprises.

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