How does crowdfunding work? A step-by-step guide for small businesses

Starting a business takes creativity, hard work, and determination. But for many aspiring entrepreneurs, the biggest obstacle is capital. Nearly half (48%) say they would start a business if they had more savings, assets, or credit, according to the QuickBooks entrepreneurship survey. So where do you find that funding?

While traditional options like business grants and loans are available, this online fundraising offers an alternative path for entrepreneurs with unique ideas or innovative projects. Let's explore how crowdfunding works, the different types, and how to run a successful campaign.

What is crowdfunding in business?

Types of crowdfunding

How to create a crowdfunding campaign

Pros and cons of crowdfunding

What to consider when choosing a crowdfunding platform

Popular crowdfunding platforms

Tips for hitting your crowdsourcing goal

What are your funding options?

What is crowdfunding in business?

Crowdfunding is a way to raise capital for a business or project by collecting small amounts of money from a large number of people. This usually happens through online platforms, where you share your business idea with a broad audience of potential supporters.

Rather than relying on a single lender, crowdfunding spreads funding across many contributors during a set campaign period. For startups or niche businesses that may not meet traditional bank requirements, this approach can offer an alternative path to funding.

Types of crowdfunding 

When you decide to crowdfund, you have various options. Each model affects your business finances differently: 

• Donation-based crowdfunding: You collect contributions without offering anything in return. This is most common for charitable causes or community projects.
• Reward-based crowdfunding: You offer supporters a specific perk, like early access to a product, in exchange for their donation.
• Equity crowdfunding: You exchange a percentage of ownership in your business for investment capital.
• Debt crowdfunding: You borrow money from supporters with a guarantee that you'll pay it back in the future. This works similarly to a traditional bank loan.

There isn’t one form of crowdfunding that’s inherently better than the other. The approach you opt for depends on your goals and what you’re willing to offer in return for the money your small business needs.

How to create a crowdfunding campaign

To get started, you need to know how to pull together a successful crowdfunding campaign for your small business. Here are the five steps to creating a campaign:

1. Define your goals and budget

Start with the basics. Before you launch your campaign, you need to get a grasp on the basics, including your fundraising goal and deadline. 

There isn’t a set formula to determine how much you need to fundraise. Look at your business plan to see where you intend to take your venture and estimate how much money you’ll need to make that happen. For example, consider: 

• Do you need specific equipment? 
• Will you need to hire staff members? 
• Do you need licenses or permits? 
• Will you need a storefront or facility? 

Understand what you plan to use the money for and do your due diligence to estimate how much those things will cost. You want to be as accurate as possible. 

Also, be sure to break down your fundraising goal into specific budget categories so backers can see exactly where their money goes. For example, if you're raising $15,000, show that $5,000 will cover equipment, $7,000 for inventory, and $3,000 for permits and licenses. Transparency like this helps build trust with potential supporters.

2. Choose your crowdfunding platform

You’ll want to create your campaign using one dedicated platform, and there are plenty of platforms to choose from. 

It’s important to note that different crowdfunding platforms have different rules, target audiences, and approaches. Do your research to choose the site that best suits your crowdfunding needs.

3. Pitch and launch your campaign

Regardless of which crowdfunding website you choose, it should walk you through the steps to input your information and publish your campaign. Since you’ve already laid the groundwork, filling in the various fields should be relatively straightforward.

You want to solicit as many donations and appeal to as many backers as possible. Go beyond the basics of your campaign and share the story behind your business and your fundraising needs.

The quality of your pitch is what sells your vision—using clear, high-quality images and a compelling story can help your campaign stand out and build trust with potential donors.

4. Promote your campaign

Launching your campaign is only half the battle. Next, you need to actively promote it to try to get as many donations as possible. 

Some key ways to promote your crowdfunding campaign include: 

• Use social media marketing to post about your crowdfunding campaign on your business and personal social media accounts
• Include a link to your crowdfunding campaign in your social media bios
• Create an email campaign to alert your email subscribers about your efforts using a tool like Mailchimp
• Put a banner at the top of your business website that directs people to your campaign
• Ask your supporters, friends, and family members to share your campaign with their networks

Self-promotion can feel awkward, especially when you’re asking people for help. But spreading the word is necessary if you want to give your campaign the greatest chance of success.

5. Monitor your progress and deliver rewards

Creating, launching, and promoting your campaign takes a lot of work, but crowdfunding isn’t a “set it and forget it” activity. Keep a close eye on your campaign to watch your progress as you pursue your fundraising goal. If you feel like you’re coming up short, you can step up your promotional efforts to hopefully bring in more dollars.

As you continue to promote your campaign, be honest about how far you are from your goal. This can instill a sense of urgency and responsibility in people who have thought about donating but haven’t taken the step yet.

Once your campaign ends successfully, it's time to deliver on your promises. If you offered rewards or perks, fulfill them promptly and communicate clearly about delivery timelines. Doing so can help you gain long-term, loyal customers.

Pros and cons of crowdfunding  

Crowdfunding has become a popular alternative financing method, but it has both advantages and disadvantages. Here are some of the pros of using crowdfunding campaigns: 

Compared to traditional loans, crowdfunding platforms generally don’t require personal guarantees or collateral to participate.

What to consider when choosing a crowdfunding platform

Choosing the right crowdfunding site is crucial to the success of your campaign. The platform you select will directly impact your ability to reach potential backers and manage your fundraising efforts effectively.

Here are key factors to consider when selecting a crowdfunding platform:

• Pricing and fee structures: Crowdfunding platforms typically charge a percentage of the funds you raise. Understand the fee structure before launching, as it will impact your net proceeds.
• Ease of use: The platform should be intuitive, allowing you to create and manage your campaign easily. Look for features like simple editors and customizable templates. 
• Customization options: Choose a platform that offers customization options, allowing you to tailor the page's layout, visuals, and messaging to align with your brand.
• Project suitability: Different platforms cater to specific project types. Some specialize in creative projects, others in technology or social causes. 
• Community and reach: A platform with an engaged community can boost your visibility and give your campaign a better chance of success.

Select the crowdfunding platform that aligns with your project's unique needs and goals, setting the stage for a successful campaign. The right platform can serve as a valuable partner in your journey.

Popular crowdfunding platforms

Once you understand what to look for, here are some of the most popular platforms to consider:

• GoFundMe is the largest crowdfunding platform, widely known for personal causes but also used by small businesses for community-focused ventures and emergency funding. With a 0% platform fee, it uses flexible funding, meaning you keep whatever you raise, even if you don't hit your goal.
• Kickstarter is ideal for creative projects—think films, games, art, technology, and design. It's an all-or-nothing platform, meaning you only receive funds if you meet your full goal. It's perfect for building buzz around innovative product launches.
• Indiegogo is a top choice for tech gadgets and innovative hardware. Like Kickstarter, it focuses on fixed funding to ensure projects have the full budget required to deliver. A standout feature is its InDemand program, which allows successful campaigns to transition into an e-commerce state to continue taking orders after the initial fundraising period ends.

Tips for hitting your crowdsourcing goal

Creating your crowdfunding campaign seems fairly straightforward—figuring out how to inspire people to donate is the challenging part. However, 9% of Kickstarter campaigns end without receiving a single pledge. Luckily, there are a few strategies you can use to blow your fundraising goal out of the water.

Prioritize transparency

For people to feel comfortable donating to your campaign, they want to know exactly where their money will go. Avoid talking in generalities. 

You need to be able to explicitly answer questions like:

• What does your business do?
• How much money do you need?
• What will you use the money for?

It’s not enough to say, “I need $5,000 to start my business.” Be as specific as possible. Something like, “I need $5,000 to purchase a kiln and a pottery wheel to launch my custom pottery studio in Durham, North Carolina,” is far more detailed and forthright. This kind of detail can instill greater trust in your supporters and backers.

Tell your story

Honesty and transparency don’t have to be boring. You want to give funders the information they need to decide whether or not they want to donate to your campaign. This is also your chance to appeal to emotions and share how you’re building your brand.

Get creative and find a unique angle you can share about your business. People will connect with that far more than straight answers and figures alone. Your business has a story that’s worth telling, but it’s up to you to find it and share it compellingly and engagingly.

Get creative with multimedia

When you think about telling a story, words seem like the default option. To make your campaign page even more alluring, it’s worth including some multimedia elements—particularly photos and videos. Many business owners have also had success with pitch videos. 

Here are a few examples of successful crowdfunding pitches: 

• Hop Stuff Brewery pitch video
• Peloton pitch video
• Pulp pitch video

These short, shareable clips provide more detail and context about your business and campaign in a highly engaging—and even inspiring—way.

Offer rewards to backers

Opting for reward-based crowdfunding requires offering something in return to your backers—whether it’s a discount code, swag, exclusive access to a product, or something else. However, even if you don’t choose the reward-based route, providing something to your funders can be an effective way to show appreciation and increase loyalty.

This doesn’t need to involve a huge investment in time or money. Something as simple as a branded pin or a shoutout on social media goes a long way to show your supporters you are grateful for their donation.

Build and maintain relationships

With most platforms, you’ll get the email addresses of all of your backers if your campaign is fully funded. Use that information to improve your customer relationship management. 

Add supporters to an email list where you can keep them updated with: 

• Thank you messages to show your appreciation for their support
• Information on how your business performs (and how their donation helped)
• Access to perks like discount codes or new product announcements
• Helpful information or resources related to your business and industry

Consistent engagement turns backers into stakeholders who are personally invested in your long-term success. These people can also double as potential repeat backers if you ever need to crowdfund again.

What are your funding options? 

Crowdfunding can help you secure the capital you need while simultaneously fostering a connection with supporters. With that said, it's by no means a quick and easy way to get funding for your business. 

After figuring out how crowdfunding works, you may decide that other forms of financing would be a better fit for your business.

Use QuickBooks accounting software to review your monthly cash flow and determine how much you can responsibly put toward a campaign or repayments. Greater visibility into your cash flow can help you choose the funding approach that best fits your business.

To explore flexible funding options, check out the various options, like QuickBooks’ small business loans, to help your expansion and growth.