Best Way to Kick-Start Your Business: Crowdfunding or Factoring?
Around the world, three new businesses are born every second—a staggering number. In the U.S. alone, 530,000 new businesses are launched per month according to the Kaufman Index. If you are ready to go out on your own and are looking for capital, chances are you have considered crowd-funding as an option.
There are over 3,000 sites on the internet dedicated to raising money through crowdfunding. Kickstarter, Indiegogo, Rockethub, Fundit and other platforms are generating interest and attracting aspiring entrepreneurs. It sounds easy, and even exciting to pitch your idea in the social media universe, sharing your idea and giving other people the opportunity to participate in funding your enterprise and vision. But how easy—and how effective—is crowdfunding? And how does it compare to factoring?
First, both crowdfunding and factoring have revolutionized business finance by offering a viable and attractive alternative to conventional banks and credit unions. Both are equalizing in their approach—you don’t have to be a large entity with a big bank account to qualify. Let’s look at how they compare, and how they might work for you.
As social and people friendly as crowdfunding appears to be, your financial history will be scrutinized. Your creditworthiness will be evaluated along with the strength of your business idea. Any past bankruptcies, unpaid judgements or trailing debt can prevent you from launching the campaign. In contrast, factoring looks at a larger picture – qualifying your request on how solid your customer base is and how strong your invoices are.
Ease of Execution
Crowdfunding an idea requires a substantial amount of planning followed by sustained follow-through to keep audiences engaged and participating. Success depends on continuous marketing of the idea via social networks and in the physical world. Some entrepreneurs even invest in professional public relations or advertising firms to elevate visibility for the funding campaign. Raising funds through social networking platforms can easily become a full time job. Factoring requires minimum time and effort. The application process takes only minutes and can be executed over the internet via www.expocredit.com.
The average successful crowdfunding campaign lasts 30 days. If the campaign is unsuccessful at the end of that time, you can choose to try another 30 day effort, but in the end, if the overall campaign fails, funds are returned to the donors. Factoring firms generally respond to you within a few days, so you have your answer—and very likely your funds—in under a week.
There are multiple crowdfunding models. Some offer only rewards and gifts to contributors; others offer an equity stake in your company. Under new legislation passed on May 16, 2016, any individual investing $2,000 or more in a crowdfunding campaign can become a stakeholder in your company. If you want to maintain 100% of the equity in your business, factoring is the better choice – no sharing of equity is required.
The average amount raised by successful crowdfunding projects is $7,000. The potential amounts raised through factoring are limited only by the number of qualified invoices you hold and choose to bring to the factoring transaction.
Kickstarter and other sites typically ask for 5% of the money raised as a fee for their services. Another 3% to 5% goes to entities such as Amazon Payment for processing the contributions, for an average expense of up to 10% (4). Thousands more in expenses can be incurred if you hire professional teams or choose to produce videos or other materials to boost your efforts (5). Most factoring firms, on the other hand, receive 1.5% to 3.5% for a 30-day turn on invoices. And no outside help or promotional materials are needed.
According to Kickstarter, only about 44% of crowdfunding campaigns raise the funds targeted (5). With factoring, the success (or acceptance rate) is much more favorable. In fact, ExpoCredit, approves XXX% of loan applications received and most of those within less than 7 days.