The Basics Of Crowdfunding For Your Business

Businesses require a capital infusion at every stage of their business cycle. However, the initial investment is most vital as it allows the entrepreneur to implement the idea and start business operations. Although there are numerous traditional ways to raise business capital, such as a business loan, some entrepreneurs utilise non-traditional ways, such as Crowdfunding, to raise capital.

What Is Crowdfunding?

Crowdfunding allows businesses to raise capital through a “Crowd”, rather than from one or two major investors or venture capitalists. The crowd here represents the general public interested in the products or services of a company that needs capital to implement the idea.

The business which raises capital through crowdfunding does not seek traditional means of funding such as external investors or business loans. However, the funding amount raised from crowdfunding for business is not significantly high, but enough to start business operations.

Most crowdfunding projects are new ventures that start with an idea of a product that the business communicates to potential crowdfunding investors. When people invest in a venture through crowdfunding, the business may give some special discount or perks, such as preferential delivery, etc., to the investors. Crowdfunding for startups or business usually happens through digital platforms where potential entrepreneurs post about their products or services and the amount they want to raise to start the operations.

Types Of Crowdfunding For Business Or Startups

The aim behind starting a crowdfunding project is to receive funding from the general public. Small businesses or entrepreneurs who don’t have the necessary means to approach big investors or seek external funding utilise crowdfunding, which allows them to raise capital without having to go through legal and time-consuming processes.

When entrepreneurs use online channels to seek funding from the “crowd,” they can raise capital in the following four ways.

• Donation:

Donation-based crowdfunding is when individuals want to raise funds for a charitable or social mission with no intention of making profits. The investors also invest without any intention of getting a product or service in return.

• Debt:

Debt-based crowdfunding is a peer-to-peer lending process that allows entrepreneurs to seek funding from the backers as a loan. After closing the crowdfunding for startup or business, the entrepreneurs have to repay the crowdfunding amount to the backers with interest within a set timeline.

• Rewards:

Rewards crowdfunding is the most common type that allows entrepreneurs to receive funding against some rewards to the backers. The rewards can be the products at a discount, a subscription, goodies, etc., based on the size of the donated amount.

• Equity:

Equity crowdfunding is when entrepreneurs offer equity in their business to the backers based on the invested amount to make them the shareholders. Such a process is often not allowed on online platforms as the process requires significant legal documentation.

The Challenges Of Crowdfunding For Business

Although crowdfunding seems easy to execute, there are a lot of risks for entrepreneurs and backers. Since there is no extensive due diligence on the project, the backers can lose their money if the business is unsuccessful. There have been numerous cases of backers losing their money and entrepreneurs using the funds for other-than-business purposes.

Furthermore, no legal documents can guarantee a transparent process or repayment of debt donation. Hence, backers have become more cautious about investing their money, forcing entrepreneurs to look towards other transparent and effective means to raise money for their businesses.

The most effective and quick way to raise capital for small businesses is to take a small business loan from a quality lender. Similar to crowdfunding for business, lenders have designed small business loan products to offer quick capital to entrepreneurs, approved and disbursed within 24 hours. The process is more transparent and risk-free and comes with attractive and affordable interest rates.

Avail Of An Ideal Small Business Loan From IIFL Finance

IIFL Finance offers small business loans at par with crowdfunding startup India projects that are collateral-free with attractive interest rates and tailor-made for MSMEs with less financial needs. The loan application is paperless, with minimal documents needed, and offers instant approval and disbursal of the business loan amount. You can apply for the loan online by verifying your KYC details or visiting IIFL Finance nearest branch.

FAQs:

Q.1: Can I use the business loan amount from IIFL Finance to invest in my new business?
Ans: Yes, as long as the expense is for your business, you can use the amount to invest in your new business.

Q.2: Do I need to pledge collateral to take an MSME business loan from IIFL Finance?
Ans: No, this type of loan does not require collateral to sanction the loan.