We’ve all seen the latest gizmos advertised on Kickstarter. Crowdfunding is an excellent way to pre-sell products and services to people and get cash into your business. However, delivering on that promise often causes a great deal of stress for the company seeking money. Furthermore, many funders are left empty-handed because there is no legal contract guaranteeing that the product will be delivered. Campaigners merely oblige themselves to do their best to deliver the product or service. What does this have to do with Crowdlending? In this post, we compare and contrast two other ways of getting money and see the advantages of Crowdlending.
Isn’t Crowdfunding the best way to raise money?
Let’s say that you’re not looking to invent a new frying pan or a lighter suitcase or more comfortable and sustainable jeans. No, you have a small business. Maybe you’re a shop looking to renovate, or a small manufacturer looking to implement new machines to minimise downtime, or maybe you’re a small brewery looking to expand production. All of these activities are often capital intensive. You might spend tens or hundreds of thousands of francs on any one of these projects. How will you get that money? You could try rewards-based Crowdfunding. Crowdfunding gets you cash that you don’t need to pay back, but you’ll need to deliver if you don’t want to risk your reputation.
One of the greatest expenses will be time and money on communication and developing the product. Marketing for even a simple product can quickly cost you CHF 15’000+ according to Joe Recomendes from SocialMediaToday. We’ve created two scenarios below to illustrate this point. When you add in all the costs of running a Crowdfunding campaign for which you thought you needed CHF 25’000 for the production, you’ll realise that you need to raise at least CHF 41’000 to cover all your other costs. In the end, you can expect to need to raise 40 – 60% more money than you need to do the first task at hand. Here’s how it breaks down:
Cost Analysis for two Crowdfunding Campaigns
| Lower Limit Cost | Upper Limit Cost |
Fix Costs | | |
Product Design | CHF 3’000.00 | CHF 7’500.00 |
Prototype Manufacturing | CHF 5’000.00 | CHF 10’000.00 |
Sub-total (Design & Prototype) | CHF 8’000.00 | CHF 17’500.00 |
| | |
Photography & Video | CHF 500.00 | CHF 5’000.00 |
Expos & Trade Shows | CHF 500.00 | CHF 6’500.00 |
Online Advertising | CHF 3’000.00 | CHF 10’000.00 |
Press Releases | CHF 300.00 | CHF 3’000.00 |
Sub-total (Marketing) | CHF 4’300.00 | CHF 24’500.00 |
| | |
Cost of Manufacturing Products | CHF 25’000.00 | CHF 50’000.00 |
| | |
Total Fix Costs | CHF 37’300.00 | CHF 92’000.00 |
| | |
Variable Costs | | |
Shipping | 2% | 10% |
Platform Cut | 4% | 5% |
Payment Processing Cut | 3% | 5% |
| | |
Total variable costs | 9% | 20% |
| | |
Grand Total | CHF 40’989.01 | CHF 115’000.00 |
| | |
% of funds raised for dev & campaign costs | 39.01% | 56.52% |
Should small businesses sell equity to investors to get more money?
If you’re a start-up with a product or service that will scale quickly, you might want to go down the investor route. For most businesses, we would recommend avoiding equity investors. Equity investments come with high legal fees. Furthermore, you give up part of your company, and if you’re unlucky also your vision. Especially for SMEs more cooks in the kitchen do not make things easier. Company politics can quickly detract from your income-generating activity. Furthermore, if you want to buy out an investor in can become very expensive because you cannot force them to sell.
Crowdlending is a great solution to help SMEs grow
Crowdlending is taking out a loan from the crowd. If you’re an established SME and have customers, suppliers, fans, friends and family, letting them fund your endeavour is a smart way forward. With Crowdlending, you will have a loan that you need to repay but you do not change the ownership structure of your firm. Additionally, you won’t have to spend tons of time, money and effort to spread the word to get money. You only need to raise the money you need and not more to pay for marketing.
If we look at the examples of The International Beer Bar, The British Cheese Centre and Simplyfine, we see small businesses connecting with their clients. Their customers are supporting a local business they like and earning interest. Another positive side effect is that funders have an interest in helping the business they invested in to succeed thereby ensuring that they receive their money back. This relationship builds a positive reinforcing cycle that many SMEs seek.
Why should people invest in SMEs?
Funding SMEs is a smart and efficient way of earning interest while supporting your community. According to BDO International, SMEs (companies employing fewer than 250 people) in Switzerland account for 99% of businesses and 75% of people employed work for SMEs. Furthermore, SMEs on the 3CF platform provide you with financials so you can see what their financial prospects are. Some SMEs may even offer extra non-financial perks to lenders. By lending to SMEs, investors are helping to stabilise the local economy while having funds earn interest that it would not do in a bank account.
Summary:
| Good for Marketing | Keep Company Ownership | Low Cost | Easy to apply and get funded |
Crowdlending | ✔️ | ✔️ | ✔️ | ✔️ |
Crowdfunding | ✔️ | ✔️ | ✘ | ✘ |
Investors | Possibly | ✘ | ✘ | ✘ |