When it comes to financing a new business, there are a number of capital raising methods that may suit your needs as an entrepreneur.

Crowdfunding is a way for businesses to raise funds through payments made by members of the public. This is generally facilitated through the use of crowdfunding websites. This would involve posting your business idea as a pitch to potential backers, onto one of these websites. In order to promote donations, incentives and rewards are typically offered. For example, for every $50 donation you may receive a piece of merchandise or a discount on the product.

When deciding on the best funding method for your new business, it would be wise to weigh up the associated pros and cons. It may also be helpful to consult a commercial lawyer to sure up any doubts or concerns you may have.

Pros of Crowdfunding

The benefits of opting to use crowdfunding over other methods of finance include:

  • There is no initial cost for you to start a crowdfunding campaign.
  • A crowdfunding campaign can establish a committed customer base for your business.
  • As an owner you would maintain full financial control of the business, as opposed to distributing shares.
  • A lower risk is present as your personal funds are not being invested.
  • Crowdfunding would provide your new business with a gauge on how the public perceives your product/service.
  • The potential for those who donate to promote your business through their networks, essentially creating a free form of marketing.

Cons of Crowdfunding

As with the majority of funding options, there can be various negatives. These include:

  • As an owner, you would have to provide incentives or rewards to encourage donations, which may come at a cost.
  • Crowdfunds require a set period of time in which your funding goal should be reached. This adds additional pressure and stress onto your new business to produce.
  • As a new business you would encounter fierce competition for crowdfunding finance, and therefore must find a way to distinguish yourself.
  • In order to secure backers, you will need to create a campaign to pitch your concept to the public and encourage donation over competitors.
  • An expectation is formed that you will deliver the product/service which was initially pitched in your campaign. This can limit the ability to alter your business offering along the way.
  • If you manage to receive donations, you will need to invest time into keeping those backers informed on your business’ progress and how their funding has been utilised.

Before you post your business up on a Crowdfunding website, it is important to also know the difference between crowdfunding and crowd-sourced funding to avoid any unwanted legal issues.

Crowd-sourced funding differs in that it involves offering backers shares in your business in exchange for finance, rather than just being a donation. If your business opts for this method, you must comply with the requirements of the Corporations Amendment (Crowd-sourced Funding) Act 2017. ASIC provides a regulatory guide which assists companies seeking to raise funds through crowd-sourced funding, to understand the legal requirements involved.

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Christopher Tsiknas

Chris is a member of the content team at LawPath. He is currently studying a Bachelor of Business and Bachelor of Laws at UTS. He is interested in how marketing communication strategies can influence the future of legal technology.