Today you can start an online business by bootstrapping it, but sometimes you end up needing funds due to fast growth, or to afford new equipment and funding. However, like most start-ups, you don’t have the best credit yet (or even any). So, you look for alternatives. Two alternatives that you can use are equity-based crowdfunding and rewards-based crowdfunding.
Equity Based Crowdfunding
Equity-based crowdfunding sites have raised billions of dollars for start-ups and cash-poor businesses 40 times more than other forms of fund generation. With equity-based crowdfunding, investors own some of the equity of the business that’s raising the money. How this works is that when the business is profitable, those who own equity in the business get a check.
The difference is that you may end up with 30 investors each owning 1 percent of your business if you chose to give up 30 percent of your equity during the fundraising process. That means you’ll have to send out checks for 1 percent of your profits each year that you’re in business. You might end up with fewer investors than that, but this is the gist of it.
There are legal issues surrounding equity-based crowdfunding and due to that, there are three types of equity crowdfunding that you can try.
Essentially, equity financing is not a loan, but an investment that other people make in someone else’s business idea. They hope they’ll get a return on investment but they may not get one, because if there is no profit, they will receive no payout.
Rewards Based Crowdfunding
This type of crowdfunding is not a loan or an investment. Backers simply offer a donation in exchange for a reward. The reward could be as small as a thank you, or as big as the product itself. Often rewards-based crowdfunding is done by creative types. Artists, photographers, musicians, and YouTubers like to use this method, using Patreon.com as their source.
Say you’re a YouTuber and you have more content you’d like to deliver but you want it to be more private. Instead of a traditional paywall, you set up an account where people give donations and the reward is to be delivered the private content that the public doesn’t get. This is a great way to deliver higher quality content inexpensively. If 20 people pay 1 dollar, then you’d get 20 bucks for the content that you’re delivering. Often, people who are popular end up earning enough after a time to focus on their art full time.
How Do You Know Which One You Want to Use?
First, look at your business and the amount of money you’re going to earn overall if all goes perfectly. Is your business going to generate millions each year or just six figures? While six figures are awesome for one person, it’s not really enough for investors to bother with. Therefore, consider rewards-based crowdfunding for your idea.