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What You Need to Know About Rewards-Based Crowdfunding

Updated on April 6, 2015

The Need for a Comprehensive Budget in Crowdfunding

Any person who is internet-savvy must have heard about the hype surrounding crowdfunding. It has been bruited about that the platform was able to raise hundreds and millions of dollars for various projects worldwide. However, this platform is not free to use. Like any business, you need to have funds to roll over in order to kick-start your campaign. There are several platforms to choose from, and they may not charge you until they see your project flying. Nonetheless, you need to hire professionals for you to have a successful campaign. Hence, the preparation of an intensive budget is a MUST and should include all pertinent costs from pre-launching to post campaign activities. Not being able to do your math right, may lead to disappointments and outright failure later on.

The budget for a crowdfunding campaign, can be broken down into three tiers:

Development cost - includes all expenses prior to the launching of your project. The expenses take into account marketing campaigns, video production, website design, Public Relations, and professional fees. The cost normally ranges from 10% to 20% of total project cost.

Operating Expenses - include platform fees that range from 4% to 8%, financing charges from either PayPal or Amazon of from 2% to 4%, and for an on-going marketing campaign that averages to around 10% of total project cost.

Reward Cost - includes delivery of rewards to investors, and may range from 20% to 30% of the total amount raised, if the campaign is successful.


What is Crowdfunding?

Relevant Expenses Needed for Budget Preparation

The budget should include all pertinent details that are directly associated with the project. A comprehensive listing would assure you that every cost is accounted for and you don't get surprised if they cropped up later on in the middle of the campaign. Foremost, is for you to make a reliable estimate of your funding requirements. The cost estimate must only include expenses directly identifiable with the project. What then are the relevant expenses that must be accounted for?

First, would be overhead costs. These include Administrative Expenses - salaries of personnel and staff; rental of office space and equipment, utility expenses, and office supplies; Marketing Expenses for flyers, advertising and promotions, and; Miscellaneous Expenses for contingencies;

Second, fees billed by the crowdfunding platforms. In order to exist, the platforms should earn money for themselves. Hence, they keep a percentage of the funds raised, as their fee for the use of their services. The percentage varies per platform. Among the top five crowdfunding platforms are: Kickstarter that charges 5% for a successful campaign. Amazon, which receives the funds, charges an additional fee of from 3% to 5% of the amount raised. The downside is that, you have to be a resident of the United States to avail of their services.

IndieGoGo is another site that is similar to Kickstarter. The only difference is that, you can use the platform for charities and donations. Payment is coursed through PayPal and charges a fee of 4% of the amount raised, 3% for credit card processing, and an additional $25 fee for non-US residents. This platform is cheaper at 4%, if you reached your target. If not, the fee shoots up to 9%.

Other platforms are: FundRazr charges a fixed fee of 5% whether the campaign is completed or not and 2% plus for transaction fees; GoGetFunding charges 3.5%, regardless of the amount raised plus 2.9% for transaction fees, and; CrowdFunder has a flat 5% fee at an all-or-nothing format with an additional 1.9% to 5% for Amazon fees. The cost structure for other platforms vary and will need to be input into the budget as additional project cost.

Funds for Business Ventures

Would you consider crowdfunding for your creative projects?

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Third, covers extra-ordinary expenses like bank commissions and fees that vary with the amount raised. Example are the transaction fees of PayPal that has the following fee structure: From $0.00 USD to $3,000.00 USD (3.4% + 0.30SD); 3,000.01 USD to $10,000.00 USD (2.9% + $0.30 USD); $10,000.01 USD to $100,000.00 USD (2.7% + $0.30 USD), and; more than $100,000.00 USD (2.4% + $0.30 USD). Payment via credit card also depends on the financing agency used by the crowdfunding company. An example, charges by Goteo is 0.8% and Verkami, 1.30%.

Fourth, are Value Added Taxes (VAT). Any amount received by a person or company is taxable. If the amount received constitutes an act of purchase, the said amount is vatable or subject to tax. The United States do not have VAT, but sales tax varies from 5% to 10%. Each country has a different VAT structure: Austria - 20%, India - 13.5%, Iceland - 18%, Portugal - 20%, to name a few.


Fifth, are Rewards. There are costs attributed to donations. Each donor expects rewards from their donation. The reward would depend on the type of crowdfunding model used. A rewards-based crowdfunding model normally gives incentives to donors for participating in the fund campaign. The rewards are usually given within months following a successful campaign. There are crowdfunding platforms that are more aggressive in courting prospects, and have expanded their product offerings to a more competitive level. KickStarter, has a reward system, where say, copies of the book can be pre-ordered from the author directly. The backers are given the privilege to know about the story of the project. Hence, the cost involved in the rewards would depend entirely on the type of crowdfunding model used:

Lending Model - this model has three variations: traditional lending arrangement where contributors expect to be paid back - with both principal and interest; Forgivable lending, where payment is only made if the project starts to earn, and; Pre-Sale Arrangements where lenders are given advance samples of products before it hits the market. Interest rates vary from 9% to 12%.

Investment Model - are in two forms with different cost implications. The equity model, entails buying out a percentage of the project equity, and; the revenue sharing model which participates in the earning stream based on agreed upon rates and amount of investment.

Source

Sites that offer Crowdfunding

Name
Funding Model
Country
ArtistShare
Keep it all
US
BountySource
Bounty or Keep it all
US
CentUp
Keep it all
US
ClassWish
Keep it all
US
CommonBond
Keep it all
US
Source: Wikipedia

Bottomline

The cost to raise funds can sometimes be daunting. Not only must you think of administrative and marketing expenses, but other cost components, as well. This pertains to government requirements like those imposed by the Securities Exchange Commission (SEC). If you intend to raise $100,000 or less, you need to submit at least two years of Financial Statements and your most recent tax returns. For more than $100,000 to $500,000, a Certified Public Accountant (CPA) needs to go over your financial reports. Raising more than $500,00 would require a full-blown audit report.

There are other requirements for regulatory compliance based on the amount raised; and $4,000 for each Financial Report submitted. Additional expenses include 5% to 10% to make your website up and running. Paying close attention to cost details would make you realize if your project is doable or not. Crowdfunding can help with the finances, but the final tally would determine if you make money out of it or not.


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    • Marcy Goodfleisch profile image

      Marcy Goodfleisch 2 years ago from Planet Earth

      Great points about crowdfunding and budgets! You are right - without a business plan and budget, it's not only difficult to get funding, it's a challenge to keep goals in mind and succeed. Excellent hub!

      Voted up and useful!

    • CelebrateUSA profile image

      Ken Kline 2 years ago from Chicago, Illinois

      Very useful information. I like the practical style of your writing.

    • csmiravite-blogs profile image
      Author

      Consolacion Miravite 2 years ago from Philippines

      Thanks much!

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