Advantages and Disadvantages of Crowdfunding For Small Businesses

When you’re considering crowdfunding for your small business, there may be a few questions you might have. Is it worth the time and effort to run a crowdfunding campaign? Will it succeed? What pros and cons are there of crowdfunding a small business?

We’ll break down the advantages and disadvantages of crowdfunding for your small business here, and let you decide!

Advantages of Crowdfunding for Small Businesses

Access to Capital Without Traditional Loans

One of the biggest advantages of crowdfunding is that you don’t have to deal with a bank. If you choose to go the route of reward crowdfunding, you can get access to capital without going into debt or needing a decent credit score. 

Even investment crowdfunding platforms can be easier to get funding from than from a bank. Platforms such as Honeycomb Credit take a holistic approach to your business and won’t turn you down due to just a less-than-stellar credit score - we’ll look at the whole picture! 

Crowdfunding Validates Your Business Idea

A successful crowdfunding campaign demonstrates market interest and demand for your product or service. You may have had family and friends tell you, “Oh that’s such a great idea, you should go for it!” Well, now is the time for them to put their money where their mouth is. 

Crowdfunding also gives you a chance to showcase your business idea to a much wider audience, meaning you can get feedback from a wider pool on whether or not this is an idea you should pursue. 

Crowdfunding Increases Brand Awareness and Engagement

Promoting your campaign can attract new customers and boost your brand visibility. It gives you a chance to tell your story to a whole new audience who may never have heard of you before. 

Supporters of your crowdfunding campaign often become loyal advocates for your business. This is especially true for investment crowdfunding campaigns - when people invest in your business, they want to see you succeed, and therefore will become loyal customers and tell others about your business!

Crowdsourced Feedback and Ideas

Crowdfunding portals often have sections where your backers or investors can offer feedback or comments on your business. This gives you the opportunity to engage with backers to refine your product or service based on their feedback and suggestions.

If you run an investment crowdfunding campaign for your business, you also have the opportunity to engage with investors and further explain any questions they might have about your financials or plans with the investment. Opening this dialogue is excellent because it may give you the chance to convince an investor to take a shot at investing in your business. 

Disadvantages of Crowdfunding for Small Businesses

Highly Competitive Environment

Thousands of campaigns compete for attention, making it difficult to stand out without a compelling pitch.

Honeycomb Credit does an excellent job of working to make your investment crowdfunding campaign stand out - we provide you with a free promotional video and take time to coach you in the process of creating and launching your crowdfunding campaign. 

Time-Consuming Process

That being said, crafting an engaging campaign, managing updates, and responding to backers requires significant time and effort. If you haven’t written a bio for you and your co-founders, an engaging story of your business and what you want to achieve with your campaign, and created engaging photo and video content, it’s essential that you do so for your crowdfunding campaign. 

Furthermore, you need to be on top of marketing your crowdfunding campaign, getting the word out about it, and engaging with potential backers. This can take a lot of time, on top of running your business. 

Fees and Platform Costs

Like with most ways to fund a business, most platforms charge a percentage of funds raised, which can reduce your overall funding amount. Additional payment processing fees may also apply. Do your research to find which platform’s fee structure works best for you and your goals. 

Crowdfunding has Uncertain Outcomes

Unlike walking into a bank and walking out with a loan, there's no guarantee that your campaign will reach its funding goal, leaving your project on hold. This is why it’s important to put the work in, do your due diligence, and be prepared with other options.

Limited Long-Term Funding

Crowdfunding is typically a one-time capital boost and may not sustain ongoing business needs. This makes it a really good option for those one-off projects you might have - like building a new location, purchasing a food truck, or completing a renovation project. It allows you to make a splash and get the funding you need and community support behind it. 

However, crowdfunding campaigns for ongoing costs of business such as marketing and staffing tend to not succeed as much because investors tend to see those kinds of things as business operation expenses, not investment in growth. That being said, projects with this angle have had successful crowdfunding campaigns before - it depends on how it’s packaged and the context of the business. 

Weigh the pros and cons of crowdfunding, and make your choice

If you want to learn more about investment crowdfunding, we’re happy to chat with you at Honeycomb Credit! Fill out the form below and we’ll get you started with more information.