I spend an awful lot of time talking about, and dealing with, SBA Loan Default. In some cases, the borrower simply should not have borrowed the money in the first place. Sure, it seems easy to take a loan in order to fund your business. Submit an application, sign a few pieces of paper, and several hundred thousand dollars is all yours! The part that is not discussed all that much is that whole pesky repayment thing. I say that in jest, but I’m also kind of serious. I really believe that people don’t often consider the responsibility that comes along with borrowing money. Sure, if the business does well, you’ll repay the debt without much fanfare. The part that doesn’t get its fare share of attention is the downside. If stuff goes sideways, whether its your fault or not, stress will rain down upon like you’ve never seen. The prospect of losing your home, your business, and all your money is enough to break any tough as nails entrepreneur. So it borrowing the money the right way to go? Is it worth the risk? Well, it depends.
What if there was a way to get your hands on some money without putting your entire financial life on the line? Actually, there is! Before I launch into my song and dance about the virtues of Kickstarter, I’ll warn you that Kickstarter is not the perfect replacement for a business loan, but it certainly could make sense for certain types of entrepreneurs. So, with that out of the way, let’s get on with it!
What is Kickstarter?
Kickstarter is what’s known as a crowdfunding platform. At its most basic form, Kickstarter (which I’ll refer to as “KS”) allows people with ideas for projects (movies, books etc) or products (gadgets, clothes, etc) to raise money for their projects. So, rather than sell products after you make them, KS allows you to sell these products BEFORE you make them. It’s basically a pre-sale model. This allows creators to fund the production of their item without having to borrow (like through a bank loan or a home equity loan against their home) funds, without all the pressure of paying it back. To be fair, banks don’t typically give loans for these sorts of projects, but for many businesses, launching a Kickstarter is how they launch their business….first one product, then another, and so on. All without ever having to complete a personal financial statement.
Do You Have To Repay Kickstarter Funds?
No, Kickstarter is a not a loan. The way it works is pretty cool. Project creators list “rewards” for backers by setting backer levels. It’s basically a pre-sale price that backers pay in exchange for a product. In most cases, the creator offers higher discounts to early backers, and later backers pay a little more. For example, if I were making a machine that could make peanut butter and jelly sandwiches on its own, I would list this machine as a reward for the first 100 backers who contribute $500 or more. The next level would be for the next 100 backers who contribute $550, and so on.
Sounds too good to be true. What’s the catch?
The catch is that competition for crowdfunding dollars is fierce. Back when KS first started, campaigns could list their project, and there was a chance that people checking out the site might back them. Today, at any given moment there are hundreds, if not thousands, or projects all vying for your crowdfunding dollars. This means that you can’t count on the people to simply find you. Most successful campaigns drive traffic to their KS campaign. This could take the form of a mailing list that the creator previously built, or it could mean paying for traffic from facebook (the most popular way to drive traffic). So to have a serious shot at success, you will need to dedicate some resources into making your project a reality.
So I just post my project, and then I get whatever money comes my way?
Not quite. In order to get the money, you need to set a goal, then meet or exceed it. If you come even a dollar short, you get nothing. This is why smart project creators always set modest goals. Set a $5,000 goal, and raise $49,000? That makes you a smashing success. Set a $50,000 goal and raise $49,000? You get nothing and need to start all over again.
So, if you have an idea for a product, and borrowing doesn’t sound like your cup of tea, you may want to consider a KS campaign!