Table of contents
Table of contents
Getting the right funding for your small business can be tricky. When you’re just starting out, applications for grant funding can be competitive, and traditional avenues like bank loans, venture capital and big investors may not be easy to find either. So, what options do you have? Enter, crowdfunding!
In this article we’ll explain how crowdfunding works, the different types available and (of course) how to account for crowdfunding income in your financial records.
Crowdfunding is a way of raising cash by asking lots of people to each give a small amount towards a specific product or cause, usually via the internet. It’s like turning to your friends, family and even strangers for financial help to bring your idea to life, whether it’s launching a new gadget, producing a film, or supporting a cause close to your heart.
With platforms like GoFundMe, Kickstarter, and Indiegogo you can share your project with the world, and if people believe in it, they can chip in to help make it happen. It’s a modern twist on passing the hat around, but with the power of social media and the internet to reach a much bigger audience.
There are a few different types of crowdfunding which are intended to help meet different goals and needs. For instance, reward-based crowdfunding offers backers a special perk or product in return for their support – think of it like pre-ordering a cool new gadget.
Equity crowdfunding, on the other hand, lets people invest in your company and own a piece of it, sharing in its potential success. Then there’s donation-based crowdfunding, where people contribute out of the goodness of their hearts without expecting anything in return, often for charitable causes or personal emergencies.
Crowdfunding not only helps raise funds but also builds a community around your project, turning supporters into advocates who help spread the word and bring your vision to life.
Crowdfunding can be a game-changer for all sorts of small businesses, from tech startups developing innovative gadgets to local artisans creating handmade crafts. It’s perfect for food entrepreneurs launching a new café or food truck, creative artists producing music or films, and authors self-publishing their books.
Even community projects, like opening a local yoga studio or a sustainable fashion brand can gain traction and support through crowdfunding. Basically, any small business with a compelling story and a passionate vision can use crowdfunding to bring their ideas to life and build a loyal customer base from day one.
The amount that crowdfunding can raise varies from anywhere between a few hundred to tens of thousands of pounds. There are a few exceptions to this, where companies have had extremely successful crowdfunding campaigns, heading into the millions.
Not everyone is going to want to part with large amounts of their hard-earned cash, but small amounts from many investors add up, and they want to feel like they are getting “value” or something “special” out of their investment.
Careful planning is key here. Bear in mind that crowdfunding requires a certain amount of transparency, which can potentially expose your business to competition and give away your secrets!
Go for a crowdfunding platform that aligns with your small business model and funding needs (we’ve mentioned some of them already). After picking the platform and confirming it can be used for business purposes you will need to complete a business profile with them. Some providers may review your application before they allow you to use their services.
Define the amount of money you need to raise and how any crowdfunded income will be used. Clear and transparent goals build trust with your potential investors. Some platforms allow you to keep the funds you raise even if you don’t reach your target.
You generally pay for using crowdfunding platforms through a percentage of the funds you raise or a monthly fee – Kickstarter takes 5% for example.
Create a narrative that resonates with people. Highlight the issue your business aims to solve and the big impact that their small investment will have.
Shout about what you’re crowdfunding for on your social media, in email newsletters and press releases, and on your website. Engage with your local community and encourage investors to share the campaign with their networks too. An effective crowdfunding campaign can generate a lot of great publicity for your business.
Give regular updates on progress, challenges and achievements as this again helps build trust and engagement.
Recording your crowdfunding income in the right way is so important for maintaining accurate financial records and staying the right side of the rules.
Don’t forget that most crowdfunding platforms tend to charge fees, but you can record these fees as a business expense. Also bear in mind that different types of crowdfunding income may have different tax implications. This is why it’s well worth getting some professional accountancy advice if you’re not sure.
How you will need to account for your crowdfunding income depends on the type of crowdfunding you choose.
For reward-based crowdfunding, backers contribute money in exchange for a reward, which is usually the product or service the business is developing. When funds are received, record the total amount as a liability (unearned revenue) because the obligation to deliver the reward has not yet been fulfilled. Once the product or service is delivered, treat the income as revenue.
For equity crowdfunding, backers invest in exchange for shares or equity in the company. Record the funds received as an increase in equity. Typically, this will involve common stock and additional paid-in capital accounts.
With debt crowdfunding, backers lend money with the expectation of repayment with interest. You should therefore record the funds received as a loan payable and recognise interest expense over the life of the loan. When repayments are made, reduce the loan payable.
Finally, with donation-based crowdfunding, backers give money without expecting anything in return. In this case, record the funds received as donation income.
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A creative content writer specialising across business, finance and software topics. I have a love for all things writing, and creating engaging, easy to understand content that helps everyday people!
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