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Which Types of Crowdfunding Should My eCommerce Business Consider?

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Most eCommerce businesses have many competitors.  Therefore, you may need funding to boost your market placement, for example, through bank loans. Raising eCommerce funding for your online brand may be to get you up and running or expand your existing brand into a new product or service. Either way, crowdfunding can increase capital for your eCommerce brand, such as through potential investors. This article will explain to business owners the different types of crowdfunding your eCommerce business could use.

What Is Crowdfunding for My eCommerce Business?

Crowdfunding for your eCommerce business is a method to raise finance for your online brand. You are likely already familiar with some ways to raise capital for your business, such as:

  • bank loan;
  • venture capitalists;
  • angel investors; and
  • private equity.

However, raising finance through crowdfunding differs from traditional methods of gaining funds for your eCommerce business. 

Crowdfunding is a method of raising funds through the public via the Internet. You pitch your business on a crowdfunding platform, an internet business specialising in helping brands raise money this way. These include:

  • Crowdcube;
  • Seedrs; and 
  • Funding Circle.

You can also pitch on social media and include links to your online brand. 

What Are the Different Types of Crowdfunding for Businesses? 

You may decide that crowdfunding is the best way to raise your internet brand’s finances. It has become a powerful way to gain business funds, particularly when the economy is bleak. However, if you are considering crowdfunding, you need to know the different types of crowdfunding available for your eCommerce brand. Once you understand, you can choose the most suitable for our internet brand’s circumstances. 

Below, we explain the three main types of crowdfunding that may be relevant to your eCommerce brand. You should note that raising money through donation crowdfunding is also possible. However, this is usually for charitable causes rather than businesses like yours.

Reward-based Crowdfunding

Reward-based crowdfunding is where you ask members of the public to fund your internet business and, in return, allow them an opportunity to receive a reward. This could, for example, be to be the first customer for a new product. It is, therefore,  a form of pre-selling before you finish your new product.

You might choose reward-based crowdfunding for your eCommerce business because you are already a well-known eCommerce brand. You may also do so because, although you may not be well known, you have a good marketing department or marketing agency. This type of crowdfunding requires effective marketing for success. Also, this type of crowdfunding usually only results in a small amount of funding, so it may be suitable if your internet brand does not require too much finance. 

Another reason your eCommerce business might use this crowdfunding type is because you have a fantastic product to sell. If it is your product, you will reward the public, so it must be enticing. For example, perhaps you are an eCommerce business selling fashion during the winter, producing a piece of clothing that keeps people warm yet conforms to the latest fashion craze. 

Equity-based Crowdfunding

Equity-based crowdfunding is where private investors, including professional investors like VCs, invest in your eCommerce brand. This means they provide you with finance in return for shares in your eCommerce business. Your internet business usually has to pre-approve who can invest in it through this crowdfunding type. 

You may choose equity-based crowdfunding for your eCommerce brand because you are a new internet business. This type of crowdfunding tends to raise large amounts of finance. You might also choose this type of funding for your eCommerce brand because you are a business-to-consumer brand, such as a business selling home kitchenware. Business-to-consumer brands can appeal more to investors.

As a new eCommerce brand looking to get up and running, this could make things move fast for you. For example, you are an eCommerce brand that wants to sell many helpful and innovative gadgets you have recently invented to consumers. Choosing this type of crowdfunding means you open your internet brand up to potential customers who are your investors

Loan-based crowdfunding

Loan-based crowdfunding is when members of the public lend you money to raise finance for your business. You will later return this to them with interest. Each individual may lend you anything from £20 to as much as £250,000. People often refer to this as peer-to-peer lending.

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You could decide on reward-based crowdfunding for your internet business because you want to raise as much as possible for your eCommerce business and are sure your business will make money. The latter is crucial because you must repay the loan with interest. Perhaps your internet brand is offering a marketing service to other companies, which you are confident is in demand. This may be because you researched the market for the type of marketing and know your costs are competitive within the industry.

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Key Takeaways

If you choose crowdfunding for your eCommerce brand to raise finance, you must decide which type to select. Crowdfunding is where your internet brand pitches itself on a crowdfunding platform to raise funds through the public. There are three types of crowdfunding for your eCommerce brand. These include reward-based crowdfunding, equity-based crowdfunding and loan-based crowdfunding. 

This article has explained how to choose which crowdfunding type best suits your eCommerce business. For example, if you are a start-up business looking to raise a lot of capital, you may select equity-based crowdfunding. You may also choose reward-based crowdfunding if your product looks to be a real success. 

If you need help understanding the different types of crowdfunding your eCommerce business could use in the UK, LegalVision’s experienced eCommerce lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.

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Clare Farmer

Clare Farmer

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