Crowdfunding: A step closer towards smart funding for SMBs

Tally Solutions |Updated on: May 23, 2022

This article, where our Global Marketing Head, Jayati Singh talks about how crowdfunding has become the next big thing in MSME financing was published in money bhaskar on June 24, 2019

The small and medium business sector in India has been growing at a rapid pace and contributing to boosting the economy on a large scale. Government stats state that they contribute around 37% to the GDP and employ the largest number of people in the industrial and services sectors. There are 633 lakhs MSMEs, in India and they employ about 11.10 crore people across various sectors. With such exponential growth, it is important for not just the government to draw attention towards empowering small and medium businesses, but also financial institutions to provide them with adequate funding to improve their financial status.

While there are numerous schemes that aim at providing financial assistance to the small and medium business sector, crowdfunding is one of the techniques which has been adopted by small businesses to increase scalability. In crowdfunding, funds are raised in (solicitation) small amounts from various investors through an e-platform or social platform for a specific endeavour, a business venture or a benevolent cause. The funds are raised in small amounts from many investors and have become a major trend in terms of financing of MSMEs in recent times. There are primarily 4 types of crowdfunding: Donation, Reward, Peer-to-Peer lending and Equity. Let’s look at each of these crowdfunding methods and how they can help small and medium businesses get the right kind of push:

Donation Crowdfunding

The funding is given in the form of donations and thus donors do not expect any tangible benefits as return. In most of the cases, it is for social/philanthropic purpose.

Reward Crowdfunding

This form of crowdfunding comes along with a certain kind of expectation in return which should be tangible. These benefits may be immediate or future, eg: in form of a customer or a lifetime membership or some free goodies.

Peer-to-Peer Lending

The funding is arranged between two individuals using an online platform. In this, online platforms match lenders and investors wherein loan amounts and interest rates are set by the platform. However, in this type, investor protection is a challenge for regulators.

Equity-based Crowdfunding

The funding is given in exchange of issue of equity shares of the company. The investors will receive a number of equity shares against the investments made online. This type of crowdfunding could work best for growth-focused companies in areas where there is potential for return.

Why Crowdfunding?

Crowdfunding not only helps provide financial aid to start-ups, but also gives individuals opportunities to streamline the customary model of their businesses. Typically, entrepreneurs invest months together filtering their business processes through various sieves. But, with crowdfunding efforts, these aspirants get to explore their business in different ways along with more invested individuals, who’d passionately help develop your business. While adopting any new technique, every individual is curious to know about its advantages, and so here we are laying out the benefits of choosing crowdfunding for your business:

Easy access to financial advice

Various crowdfunding portals provide you access to licensed financial specialists, whom you can connect with and share your funding campaign.

PR and Marketing

Crowdfunding is one of the best-proven ways to propagate your business venture, which might be tough otherwise. Start-ups often face challenges of not being able to market themselves in the industry, but crowdfunding provides you with an opportunity to “make noise” about your venture.

Justification of concept

Presenting your business to a large crowd before your business kickstarts provides you ample opportunity to experiment with your marketing strategies. Crowdfunding is the forum for you to check, assess and make changes that would yield better results for your business.

Zero investment

No monetary pre-requisites yet with numerous benefits, crowdfunding is an excellent way to raise funds for your business without bearing any additional expenses.

While crowdfunding is usually connoted as a financial source for non-profit and social-cause entrepreneurs, there are start-ups with a slightly different vision who have benefited through this technique. Some of the top crowdfunding ventures in India that have supported the dreams of several upcoming entrepreneurs are, Ketto, Catapoolt, BitGiving, ImpactGuru, etc.

With the Government stressing so much on Digital India, crowdfunding is definitely the next big thing that is becoming a catalyst for micro, small and medium business financing. From the adoption of the latest technology to going digital in every possible way, MSMEs need to make a grave decision on the funds’ inflow. With numerous crowdfunding options available at small and medium businesses’ disposal, it is advised that entrepreneurs make the most of these opportunities and facilitate funding for their businesses. In crowdfunding models, businesses are expected to adapt to the new technology and be in sync with the evolving marketing norms, and to stay on top of their game, MSMEs must not fear away from changing their digital behaviour.