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Crowdfunding Pitfalls Small Business Owners Must Avoid at All Costs

2 Mins read

Financing a business isn’t as easy as it used to be. As of last July, the small business loan approval rate was only 23.1%. This was a slight drop from the prior month, but is still significantly lower than the approval rate for SBA loans before the credit crisis.

Fortunately, there are other ways that small business owners can raise capital. Crowdfunding has become one of the most popular alternative financing options available. However, it is not a foolproof strategy.

If you want to use crowdfunding platforms to raise money for your startup, then you need to be diligent about it. Here are some mistakes that you should be aware before you even consider launching a crowdfunding campaign.

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1. Asking for Money Before Really Committing to an Idea

Lots of entrepreneurs make this mistake. They impulsively come up with an idea and decide to launch a crowdfunding campaign that very night.

You don’t want to start raising money for a new business idea until you have had a chance to vet it carefully. Here are some things to keep in mind:

  • Make sure you like the idea well enough to commit to it. If you hate the idea of running podcasts on bed bugs, then you don’t want to start a business around it.
  • Do your research to see if there is a strong market.
  • Make sure the competition is limited enough that you can make a mark.

If you ask for money for a business that you won’t follow through with, people will think you are either dishonest or flakey. You will have a very hard time getting funding for a future business idea.

2. Expecting Funders to Come to You

Do you remember the quote “if you build it, he will come” from the movie Field of Dreams? Unfortunately, that wisdom has no place in crowdfunding (or business in general for that matter).

You need to actively promote your crowdfunding campaign by:

  • Sharing it on social media
  • Reaching out to media outlets, bloggers and industry trade publications
  • Asking colleagues to share the news on social media

It takes effort to promote your crowdfunding campaign. Make sure that you put it in.

3. Don’t Forget About Taxes!

Money that you raise through crowdfunding may be subject to taxation. It depends on whether there is an offsetting liability (an obligation to repay the debts in the future). If there is not, then it will likely be considered income and therefore must be reported to the IRS. You need to know how this affects your tax refund loan.

4. Being Too Vague With Your Business Idea

What is it that really sets your idea apart from the competitors? Don’t make the mistake of thinking you don’t actually have any competitors. Potential investors realize that you will have competitors and want to know how your company differs.

Tim Metz, founder of Saent, said that one of the things that made his crowdfunding campaign so successful was the fact that he spent so much time analyzing competitors.

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