Wednesday 10th of March 2021
Every growth activity needs capital, whether you intend to expand into new markets or launch a ne
...w product line. Funding the business is a signific...
Every growth activity needs capital, whether you intend to expand into new markets or launch a new product line. Funding the business is a significant need for initial push and subsequent growth in the market. Entrepreneurs look for financing during the start-up phase and when the business reaches its maturity or decline.
With technological advancements, ways of financing have also become modernised. Businesses now get grants and funding from the government and can even use the internet to crowdfund their start-up or business innovation.
Crowdfunding is a relatively new way of getting the required capital by securing small contributions online from several people. The most popular crowdfunding sites in South Africa are Investment Network, The People’s Fund, Thundafund and Uprise Africa. Let us understand the pros and cons of business crowdfunding.
Pros of Business Crowdfunding
Crowdfunding is gaining popularity among young entrepreneurs who do not favour bootstrapping to set up a business. Here are the advantages of using this method.
If you are unable to secure a business loan, crowdfunding can help you start or purchase an existing business for sale in South Africa. It saves you from investing your money and taking a bigger risk. You do not need any qualifications or documentation to start the campaign.
It is simpler than ever to fund your business with crowdfunding because you do not have to look for low-interest rates, provide your credit history or find angel investors or venture capitalists. There is no running around required. You can sit at home and create a page to find a crowdfunding audience.
Crowdfunding helps to create visibility and awareness for the venture and gain a target audience. It is the best way to create an interest in the business idea or product you wish to launch. The page created on the site is viewed by thousands of people across the globe.
Showcasing your business plan to the target audience and evaluating the interest generated by them helps to understand the demand for the product. You know you have a winning product if you witness a lot of appreciation and contributions pouring in just a few days. However, if the response is lukewarm or negligible, you can save yourself from getting into a debacle.
Sharing the product details online with thousands of contributors helps to gain feedback about the offering. Their suggestions and recommendations can help improve the features of the products and make them more suitable for buyers. Thus, you can save the amount spent on market research.
When the business starts earning profits, you will have to give rewards to the contributors. However, it will make you lose your equity or control as they are not shareholders.
Communicating with many contributors will allow you to promote the products in their social and professional circles. It will bring down the cost of marketing.
Many revolutionary ideas do not see the light of day because banks do not fund them. However, crowdfunding helps break such barriers and gets financing for brilliant ideas without hiccups.
Crowdfunding means the business is already a known name, and the target audience has understood its products. It helps to give a boost to the company even before it starts operating.
Entrepreneurs looking for funds can choose from a variety of crowdfunding sites that have different campaign structures and reward policies. You can analyse the best fit for your business and take the next step.
Cons of Business Crowdfunding
Crowdfunding may be a preferable choice to get funds for your business. However, it comes with its share of disadvantages, which have been listed below.
Many small businesses or start-ups fail to meet their funding target and waste time and effort. They must return their contributions if they cannot accumulate the desired amount. So, if you are planning to use the amount to buy a business for sale in South Africa, you should be prepared for the worst.
A crowdfunding campaign needs adequate planning and execution for success. The business plan must be articulated for easy understanding of the target audience, and you must create videos and presentations explaining your product features and their usability. Also, you need to put forth a rewards plan for the contributors.
Popular crowdfunding sites have a lot of campaigns running at the same time. It can become challenging to divert the attention of the contributors towards your products or campaign. You may have to create advertising and promotional material to get visibility.
After receiving the funding, the entrepreneur is under immense pressure to deliver. They have to reward the contributors as promised within the time limit, or they will lose their trust. A start-up can lose its credibility even before it starts selling. Thus, managing the brand image is significant.
When you put out your idea in the public domain without getting a patent or copyright, it can get copied quickly. Information travels like wildfire over the internet, and it will not be long before several other similar ideas are floating in the market.
Sometimes entrepreneurs may fail to secure the entire funding and feel their idea needs to be better. However, the reason for failure could be poor presentation and pitching. It can deprive you of the accomplishment you can achieve.
You must choose the rewards system correctly to avoid paying more than you intended. A significant chunk of your profits will go away as rewards for the contributors, and you will be left with a meagre income.
Business owners have to pay an upfront fee to run their crowdfunding campaign on the site. The fee comprises a percentage of the amount accumulated through the campaign. Thus, you may have to pay about 5% of what you raise through the site.
The campaigns are timebound and usually end in a month or two. Thus, the business owner has to put in every effort to reach the target amount through higher visibility and advertising on the site, which needs more money.
The online community has a large population of people who thrive on trolling others. So, if your idea or product campaigned online for funds gets picked up by a troller with a massive following, it can tarnish the image of the brand in minutes. You may not be able to recover from the damage done to your proposed plan.
Conclusion
Business buying and starting-up are capital-intensive tasks, and it may not be easy to achieve the target without financing. If you are thinking about crowdfunding, weigh the pros and cons before jumping on the bandwagon.
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