Reasons to Avoid Small Business Crowdfunding

Are you considering crowdfunding to help launch or grow your business? At first glance, this sounds like an easy and exciting strategy to fund your dream.

However, a recent study shows otherwise. Between 69 and 89 percent of projects -- depending on the crowdfunding platform used-- fail to reach their targets, according to a new report.

Before you put time and energy into launching a crowdfunding campaign, review these reasons to go another route.

What is Crowdfunding?

Investopedia offers a comprehensive explanation of crowdfunding:

Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of friends, family and colleagues through social media websites like Facebook, Twitter and LinkedIn to get the word out about a new business and attract investors. Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.

1) Choosing the Right Platform

Forbes recently published a list of 16 of the most popular crowdfunding sites. Kickstarter isn’t the only game in town. If you don’t pick the right platform, you could find yourself wasting valuable time. Some platforms are simply better than others. Some might let you raise small amounts but not give access to those that could fund larger growth initiatives. Others won’t let you cash out unless you’ve met your stated goal. Before you launch a campaign, do plenty of research, seek out guidance and advice and read case studies.

2) Unwanted Publicity

If you have a great idea for a business, are you ready to share it online? If you want to safeguard your intellectual property, crowdfunding probably isn’t the way to go. Additionally, if something goes wrong, you might have to employ reputation management. Depending on the issue, this could be a business crusher. A recent example of a crowdfunding PR disaster was for the “Coolest Cooler”. In 2014, the high-tech cooler raised over $13 million making it the second most successful campaign on the crowdfunding website to date. Here’s how it all went terribly wrong: The Coolest Cooler Fails to Deliver

3) Risks to Investors and Entrepreneurs

Crowdfunding can be seen as a risky prospect, keeping potential investors away. Less experienced investors, those most likely to be interested in crowdfunding projects, may face more risk than they can really afford. There are also dangers for the small business looking for funding. An entrepreneur with rudimentary financial skills, might not have the experience to manage the funding process correctly and legally.

4) Administrative Hassle

In 2015, the Securities and Exchange Commission released 685-pages of crowdfunding rules. A crowdfunding campaign can result in a ton of questions and other investor actions. If you don’t have a bandwidth to understand all of the rules and handle campaign communication, you might need to rethink your strategy.

5) You Could Qualify for a Loan Instead

Some entrepreneurs are scared away from seeking a traditional loan. Going through a bank can be daunting, required paperwork can be overwhelming and the possibility of getting into an expensive loan is real.

The good news is that you can secure low-cost funds to grow your established business with an SBA loan through an easy-to-use online platform. SmartBiz has streamlined the prequalification and application process and our customers are thrilled. Along with great rates and a 10-year term, an SBA loan can be used for a variety of purposes. You can pay down existing high-interest debt, hire employees, buy equipment and more.

If you’re a start-up, there are also low-cost opportunities available. Look into low-interest rate business credit cards or lines of credit from your bank. Remember that the better your credit scores, the better loan you can secure.