What is Crowdfunding?

A new trend is making its way around the Internet and into the minds of entrepreneurs and small business owners: Crowdfunding. It means asking a crowd of people for small amounts of money to fund an idea or a project. The idea taps into the power of the greater public to help an entrepreneur realize a financial goal. Essentially, small amounts of money from a great amount of people can fund an entire project, while raising awareness at the same time.

After the Jumpstart Our Business Startups (JOBS) Act was passed in April 2012, crowdfunding has helped entrepreneurs and small business owners launch new products and businesses (or expand their existing business) without seeking traditional loans or finding major investors. The Act allows a company or entrepreneur to raise up to $1 million per year from individual investors, which is significant for individuals who did not have the opportunity to start a business or launch a product.

You are not asking for charitable donations with crowdfunding. People who invest in your effort will expect a reward, or incentive, in return. In fact, many crowdfunding sites require the business to provide an incentive for each investment. As such, it is critical to have a sound financial plan determined before entering into the crowdfunding arena. Business owners who do not have a plan mapped out can find themselves owing more in rewards than the total amount of funds raised.

Crowdfunding can be an extremely effective way to reach out to the public with an idea. And by the effectiveness of your crowdfunding effort, you can measure the public’s interest in what you have to offer. Crowdfunding platforms offer you the chance to take your idea to the public without substantial risk.

If you are interested in using a crowdfunding site to fund your next business endeavor, do your research first. Every platform has its benefits and drawbacks, and each crowdfunding site offers something a bit different. Some are better suited for non-profits, while others cater toward projects centered around the arts and creativity. Do not just select the most popular site; there may be a site better suited for your type of campaign.

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