Crowdfunding
Crowdfunding is a way to finance your business through, loans, donations or exchanging money for rewards or shares in your business. You generally do this through a crowdfunding website.
To begin, you’ll need to post your business idea (as a campaign) on the website. People can then support your campaign by contributing money to help you achieve your goal. On some websites, you’ll set a goal for the amount of money you need, and when you want to reach this goal by.
Follow our steps to crowdfund your business idea.
1. Plan carefully
Planning is an important part of crowdfunding. You’re trying to show people why they should support your product, so you’ll need to clearly show them:
- what the product is
- why they should fund your product
- the timeframe for developing your product if you reach your funding goals
- incentives, rewards or shares you’ll exchange them for funding your business idea.
There are four main types of crowdfunding you can use to get finance for your business. Each uses a different way to attract funding and may have different tax responsibilities for the parties involved.
In donation-based crowdfunding, a contributor makes a payment to your business without receiving anything in return. This is generally used to raise money for one-off projects.
In reward-based crowdfunding, you give the contributor a reward, (such as goods or services or a discount), in return for their payment.
These could be:
- goods
- acknowledgement
- discounts on future purchase of the product you are developing.
For example, you could say that for every donation of $10, you’ll acknowledge the donor on your product website. For every donation of $20, you’ll discount 5% off the purchase of your product.
Equity-based crowdfunding (also called crowd-sourced funding) is a way for small to medium-sized companies to raise money for their business. Typically, a large number of investors will invest small amounts of money and in exchange they’ll receive shares in the company.
Learn more about crowd-sourced funding on the Australian Securities & Investments Commission (ASIC) website.
Debt-based crowdfunding is where a contributor lends money to your business and you agree to pay interest and repay principal on the loan.
2. Set your goals
Set goals so your donors know what to expect. These include:
- how much funding you need
- the timeframe for getting funding
- how long it will take to develop your business or product.
It’s important to manage expectations, so your backers can track your progress. Some websites won’t let you post your campaign until you’ve set a funding goal and timeframe.
3. Check your legal responsibilities
Depending on your business idea, and the type of crowdfunding you choose, you may need to:
- register for licenses
- meet legal terms and conditions.
This is especially important if your business idea or reward to your backers, is a financial product or shares.
4. Choose where to post your crowdfunding campaign
There are a number of crowdfunding websites that differ in:
- the type of business ideas they accept
- the people they reach
- their requirements (for example, some require you to raise funds within a set period)
- their fees (some may have upfront fees, others only charge if you successfully raise your funding goal)
- how they can help to promote your idea.
Do some research to find one that best suits your business needs.
5. Post your campaign
To attract backers, try to make your campaign stand out. You can do this by presenting your business idea in a unique way. If you need inspiration, look at successful crowdfunding campaigns to see what they did.
6. Interact with your audience
Once your campaign is up, increase the number of people that see it (and its relevance) by interacting with your audience. Use social media and other ways of communicating.
Keep your backers informed about your progress. This will increase the chances of them promoting your product to other people.
7. Thank your backers
Once you raise the funds you need, thank your backers and give them their incentives and rewards. Keep their interest, by updating them as you develop your business or product.
Advantages and disadvantages of crowdfunding
Advantages of crowdfunding
Compared to other sources of funding, crowdfunding can provide:
- customers that believe in your product
- the opportunity to interact directly with your customers, who are also your investors
- the ability to get feedback from your customers while you develop and test your product
- free word-of-mouth marketing for your product through your backers
- a business you still own in full, instead of providing shares to investors
- lower commitment and risk (if you don’t reach your goal, you don’t have to commit).
Disadvantages of crowdfunding
Crowdfunding disadvantages can include:
- no guarantee that you’ll reach your funding goal in the set time
- the need to campaign and present your product well to get backers
- the time needed to interact with your backers and update them on your product and business development
- providing rewards to your backers to encourage donations
- the need to deliver the product that has been promised to your backers
- competition with other businesses crowdfunding their ideas and products.
You are responsible for implementing your business idea once you raise the funds. If you are unable to do this, decide what to do with the funds you raised. You could:
- offer refunds to your backers
- let your backers know exactly how you’ll use the funds (if you can’t refund them)
- offer other rewards to your backers.
You're also responsible for giving your backers any rewards you promised. If you can't do this, refund their donation. Otherwise, they may take legal action against you.
If you're after information about investing in a business through crowdfunding, see ASIC's MoneySmart website for more information.
Depending on the website you used, the terms and conditions will vary. Some websites let you keep the funds you raise, even if you don't reach your funding goal. Others don’t.
Read the terms and conditions of the crowdfunding site carefully to find out what your options are.
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