Interest rate: N/A (payback in form of equity or rewards)
Repayment schedule: 5+ years for equity, 1+ years for rewards
Pros: Access to diverse pool of backers, good way to establish engaged customer base
Cons: Relatively slow process to accumulate funds
Popularized by platforms such as Indiegogo and Kickstarter, crowdfunding has evolved in the last couple of years into a viable funding alternative for those looking to start a business. Crowdfunding is a great option for entrepreneurs who may not have an established track record, but who can successfully demonstrate the viability of their venture or product to potential backers.
There are two main types of crowdfunding: reward- and equity-based. Reward crowdfunding allows entrepreneurs to receive financing by offering, say, a future product in return for capital. Equity crowdfunding allows entrepreneurs to reach investors interested in owning a piece of their start-ups.
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Platforms such as SeedInvest and Crowdfunder allow you to offer equity to a pool of investors. Indiegogo and Kickstarter allow you to raise money from a pool of backers in exchange for a reward.
“Crowdfunding is an option that doesn’t look at your personal financial information at all and could provide cash for your business, particularly if it looks attractive but hasn’t hit the point where it is generating a lot of revenue,” says Gerri Detweiler, head of market education at Nav, a California-based company that helps entrepreneurs manage their business credit.
