Authored by Phil Cohen
Sometimes it seems like finding the capital to fund a startup is impossible. Banks are rarely bold enough to give loans to entrepreneurs, and nobody has enough money to fund a business project out of pocket. This conundrum often steers up-and-coming businessmen/women to alternative financing methods. One such method that has been rather popular in recent years is crowdfunding.
But is crowdfunding right for your startup? Take a look at the pros and cons of crowdfunding to determine whether or not it is the right move for your budding business.
Crowdfunding: the good
Crowdfunding really started to take off a few years ago, as the passage of the JOBS Act made it easier for entrepreneurs to use social media/internet platforms to campaign their business idea and fundraise. Startups will reach out vast numbers of people asking for small investments, promising either gifts, promotional deals, or future dividends in return. In theory, crowdfunding is an alluring system of alternative finance. For those who have a creative pitch and a strong social media game, it is a fast and seemingly-effortless way to get the cash you need to get rolling. There are several reputable sites that can launch an enterprise (take, for example, Kickstarter, Indiegogo and Crowdfunder), and since there are billions of internet users out there, there is a gigantic pool of investors. If done correctly, an entrepreneur’s aspirations can be met—and surpassed—in no time at all, assuming that they can use technology to their advantage.
Crowdfunding: the bad
While crowdfunding can be a very appealing system of alternative finance, it also has its downsides. While it can propel a few business startups to instant success, the majority will still struggle out of the gate—such is the life of the entrepreneur. This isn’t necessarily a huge problem if your crowdfunding was accrued without committing something (dividends, gifts, deals) in return. But if you did offer something back to your investors (who, it is worth mentioning, are typically “average Joe’s” that know very little about business and investment), it can get difficult to make good on your promises. You most likely drew funds from not-so-savvy investors who can be difficult to deal with.
Crowdfunding: the ugly
Stepping away from the theoretical side of crowdfunding, the fact of the matter is that ever since the JOBS Act made it an easier method of alternative finance, few small business startups have actually been able to employ it successfully. Granted, it has only been a viable practice for two or three years, but it has had a meager showing in its first couple of years of being an acceptable funding scheme. According to the Wall Street Journal, in August of 2015 only 119 companies had filed to crowdfund in regions where it is completely allowed. While it can be very attractive in theory, so far, in its application, it is not preforming too well.
Invoice Factoring: the proven method
So what is the verdict when it comes to crowdfunding? Only time will tell, really. It does have its success stories, although it is not proving itself as a very pragmatic way to fund a small business startup. If you want a risk free, established and well-trusted method for funding your new small business, look no further than invoice factoring. With invoice factoring, you never assume a single penny of debt and you work with experienced financiers. Factor Finders can set you up with the best alternative lending practice for small businesses. Call us today at 216-292-5660.