Considering a Crowdfunding Campaign? Know the Pros and Cons

You need money. It might be to pay for unreimbursed medical expenses, help someone in need, get a special project off the ground or secure capital for your startup.

Rather than asking relatives and friends directly for contributions or turning to traditional lenders, you may decide to use a crowdfunding platform. Statista, a data collection company, estimated the global crowdfunding market volume at $1.17 billion in 2023.

There are advantages and disadvantages to crowdfunding campaigns, however, so avoid jumping in to one without careful consideration.

Types of Crowdfunding

There are various types of crowdfunding platforms, so make sure you use the right one for your cause.

Donation crowdfunding platforms like GoFundMe are ideal for individual campaigns. For example, if a local cafe was robbed and you know the owner, you may use a donation crowdfunding platform to inspire community members to contribute so the person can replace lost merchandise and fix damage. Others use these donation-based platforms for their own needs, like paying off debt or meeting essential expenses when cash is scarce.

[Related:14 Easy Ways to Pay Off Debt]

As a business owner or entrepreneur, you have several crowdfunding options. Rather than assume debt, you may go for an equity-based crowdfunding platform that allows investors to take a financial stake in the company and you can raise funds without borrowing money. SeedInvest and Indiegogo are just a couple in this category. If you’d rather give merchandise or services in exchange for investor donations, Kickstarter and Fundable may be your best bet.

And if you want to borrow money from individuals instead of a financial institution, a lending-based crowdfunding platform (also known as peer-to-peer lending) can be attractive. Companies like Prosper and Kiva enable donors to earn a return on their investment.

[Related:Best Peer-to-Peer Lending Websites for Investors]

Pros of Crowdfunding

When you choose the best crowdfunding platform for what you want to achieve, the benefits really stack up.

Emergency assistance. Nefertari Williams, a freelance patient ambassador from Willingboro, New Jersey, used GoFundMe after her daughter’s college scholarship was held up. Williams thought it had been rescinded, so she started an emergency campaign. “It was move-in week and her room key would not work,” she says. “The quick turnaround time stopped my daughter’s tears.” When the scholarship funds did come in, Williams reached out to all the donors, who generously told her daughter to keep the money.

Simple and fast to create. Julie Darling, who runs West Loop Community Organization in Chicago, started a campaign on GoFundMe for a woman in the neighborhood who runs community gardens. “She didn’t have proper health care and was involved in a hit and run,” Darling says. “It only took minutes to set up and it was really easy.” The campaign exceeded the $20,000 goal by more than $2,000. Darling says the key to its success was that the woman was a beloved fixture in the community, so people were eager to give.

Borrow more for less. Traditional banks and credit unions are great, but with crowdfunding you can raise funds at higher valuations and better terms, says Joe Camberato, CEO of National Business Capital, a national lending platform. “Sometimes you don’t even need to give up equity,” he says. “As a business you can incentivize backers in creative ways, such as offering them your product or giving access to your service.”

Drums up early interest. In addition to raising capital, a crowdfunding campaign can help generate important anticipation for your emerging brand or product. “That can drive demand when you’re ready to launch,” Camberato says. In fact, that’s what Erik Fabian and Jennifer Yoko Olsen, who have a sourdough starter company, did when they used Kickstarter to launch new products. They say the all-or-nothing funding aspect built excitement as they raced to reach their campaign target in time.

Keeps people coming back. According to Mona S. Jhaveri, founder and executive director of the crowdfunding platform Music Beats Cancer, a significant benefit is longevity. There is potential for a portion of the funding crowd to continue supporting your work. “This following of loyal supporters is crucial for sustaining any business, making it a major plus with crowdfunding,” she says.

[Related:7 Best Crowdfunding Platforms]

Cons of Crowdfunding

Although crowdfunding campaigns can definitely work to your advantage, there are some downsides to consider.

Third party system isn’t always attractive. According to Darling, not everybody was comfortable donating money to her neighborhood campaign through the crowdfunding platform. “We found that some people wanted to donate to our nonprofit instead,” she says. “There was some apprehension.” Don’t assume everyone will respond well to formal campaigns, she says. In some cases you are better off asking people to donate directly to you or the person you’re trying to help.

Can take more work than you think. From creating your profile to sharing it far and wide, a successful crowdfunding campaign takes work. “It can be time-consuming, requiring significant effort and cost to attract the right crowd,” Jhaveri says. “There’s no set formula for attracting a crowd, so it’s not uncommon to attempt crowdfunding multiple times before achieving success.”

Being in the public eye can be daunting. No matter what you need the money for, you’re opening yourself up to scrutiny when you create a crowdfunding campaign. Not meeting the goal can be embarrassing, too. Because crowdfunding results are public, you have to face the possibility of public failure, Fabian and Olsen say. Although their campaign to launch DoughBed by Sourhouse was ultimately successful, the process was very stressful, they say.

Fees and delays. Simone Gordon, founder of The Black Fairy Godmother Foundation, says to be especially mindful of a platform’s costs as well as what the waiting period may be to get the money. She points out that some, such as GoFundMe, hold donations for up to 45 days. They don’t charge to start or manage a fundraiser, but 2.9% plus 30 cents will be deducted from each donation. Conduct your research by searching for the best crowdfunding platforms and comparing and contrasting fees and wait times.

The campaign may not do well. “There’s no guarantee that you’ll reach your target amount,” Camberato says. “If you rely solely on crowdfunding and don’t consider other investment options, you could find yourself short on cash if your campaign doesn’t go as planned.” For this reason, it’s best to cover your bases with other, more certain funding sources as well.

Crowdfunding Can Come to Your Rescue

Even with all of the potential downsides, generating much-needed funds for a worthy cause or a great product by taking it to the people has too many upsides to ignore.

“I believe the pros are unlimited,” William says. “You can raise large amounts of money to do great things in your life for the community or other individuals.”

Jhaveri agrees. “Each crowdfunding approach has its pros and cons,” she says, explaining that accessing capital this way is low risk, but you must be prepared for the possibility of not reaching your goal. Do it right, however, and all parties can come out ahead.

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