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How Crowdfunding can help Start-ups and SMEs

Updated on May 28, 2020

It is a well-known fact that getting a new business financed through a bank is challenging, especially during these days when there is a rapid rise in the number of start-ups in India and everyone needs initial financing. In such cases banks prefer to give money only to those individuals who have strong collaterals or any other assurance to ensure that they repay, this is because start-up loans are riskiest for any bank.

The government has issued many schemes for funding Start-ups and SMEs (for example Mudra Loans). These come with various eligibility criteria and may consume a lot of time with an ample number of documents required to avail these benefits. Multiple barriers exist for small businesses to raise money through traditional financing methods.

In recent times, Crowdfunding has gained popularity amongst SMEs, Entrepreneurs, and artists to raise money quickly and in the most efficient manner. There are various Crowdfunding websites like Crowdpouch, Milaap, Fueladream, etc., coming up to assist these businesses by connecting them directly to the supporters or backers. The process itself is quite easy, all one needs to do is make a campaign briefing the audience on the cause and idea behind the business with a short supporting story. Friends, family, fans, and people who will have trust in the idea will eventually come up and support. Crowdfunding websites provide a platform to run these campaigns effectively and even assist these businesses to raise funds by promoting their campaigns to the right audience.

There are multiple ways to get a business financed through Crowdfunding, the first one is donation based where the businesses are not liable to pay back or return any favor to the people who support them. This usually works for not for profit organizations whose main aim is not to earn money but to work for the welfare society or sustainability of the environment.

The second is reward-based Crowdfunding where the supporter is liable to receive any reward or gift from the fundraiser at any point in time after his monetary support to the business. The rewards are based on the amount of contribution made and this is the most commonly used Crowdfunding technique. An example of reward-based Crowdfunding can be the recently launched Mi Robotic Vacuum cleaner which can only be brought to India (as stated by Mi) if it gets support from at least 10,000 people. In this case, the product itself is the reward and is sometimes called Pre-ordering or Pre-selling. The initial investment by supporters is used to get the process up and running and on some later stage of time when the product is ready, it is delivered to the supporters. However, this may not be the case for every reward-based Crowdfunding, people sometimes donate/support for the cause behind the business even if the rewards are not relevant to them. Reward-based crowdfunding is useful even for YouTubers, Artists, and Film Makers.

There are other ways of Crowdfunding like Equity and Debt based which are currently not legal in India.

Keeping in mind the current situation of the COVID-19 crisis, even the SBI Chief has warned SMEs and small businesses to avoid over-leveraging. Therefore, Crowdfunding has become the best resort for businesses that have an opportunity to grow in these times. (For examples listenership of Podcasts have increased during lockdown). Unavailability of funds for daily operations may lead to huge losses, now is the time to venture into new sources of funding.

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