Small and medium scale enterprises (SMEs) play a very significant and crucial role in stimulating the growth of any economy. SME has over the years proven to be the engine of growth and industrialization because they contribute greatly to the Gross Domestic Product (GDP) of the country.
Due to a combination of certain factors in Nigeria, SMEs have not performed to optimum expectation. One major factor for the setback of SMEs in the country is the lack of access to adequate funding. Most financial institutions, if not all don’t lend to SMEs because most SMEs lack the basic requirement to get such loans and they are not well structured.
Even Entrepreneurs find it difficult to grow their businesses because most of them lack the funds that can make their dreams become reality. They have to depend on their personal savings or perhaps from little contributions from friends and family.
In order to provide alternative means for SMEs to get funds, individuals and corporate organizations have devised various means of funding these SMEs.
A new funding method has been developed by the Olisa Agbakoba Legal (OAL) known as Crowdfunding. This new strategy would help revive the growth of SMEs. It also helps to give more access to capital and funds to SMEs and to strengthen their financial base.
Crowdfunding is not yet as popular in Nigeria as it is in the US and Canada where their SMEs have benefited over $2.5 billion.
This article is meant to highlight all you need to know about Crowdfunding.
What is Crowdfunding
Crowdfunding can be defined in many ways. It can be seen as a process of collaborative financial support from a large group of individuals, usually through the internet, to raise funds for people with creative projects and help them achieve their goals.
It is also a way of soliciting with potential supporters and investors to help raise funds in the hope of turning promising business ideas into reality.
There are no known rules that guide crowdfunding in Nigeria unlike as it is in the US, Canada, the United Kingdom and other European countries where the practice is fully guided by legislation.
Depending on the terms and agreement of the crowdfunding, the owner of the project may retain the entire amount raised regardless of whether the target amount has been reached or not. For some, the targeted amount must be reached to retain the entire amounts.
Types of Crowdfunding
Crowdfunding is categorized based on the purpose of the funds. The following are the categories crowdfunding is divided into.
- Equity-based crowdfunding
In this type of crowdfunding, funds are provided in return for an equal stake or shares in the project. It involves the issuance of shares through the internet whereby investors acquire shares in projects or companies for a small amount of money with an equal stake or shares in the company’s future profits.
This type of crowdfunding allows companies that are not listed on the Stock Exchange to invite the general public to invest in their businesses. The investors, in this case, have shares in the company’s profits if there is any. The investors also lose some or all of their investments when the companies do not make any profit.
Equity-based crowdfunding is a very attractive method of getting access to funds for SMEs when they have failed to get it from family, friends, and government programs or from banks.
- Lending/Debt-based crowdfunding
This type of crowdfunding involves contributors directly lending funds to project owners. The project owners are known as the borrowers while the contributors are the lenders.
In this type of crowdfunding, the lenders can receive either real products or services in exchange for their contributions. Lending-based crowdfunding is similar to loans gotten from a bank or other types of loans but they usually have lower interest rates.
The procedure of lending/debt based Crowdfunding starts when projects owners post all relevant information about the project and are continued by giving out sales incentives. The project owner also posts the needs of the investment, the goals of the project and the deadlines on the project website.
In cases where the project does not receive the amount of funds that have been solicited for, the lender may be refunded under this model.
- Donation Crowdfunding
This type of crowdfunding involves contributors raising funds for project owners or companies through mere donations with no expectation of rewards or returns from the project owners or companies.
Donation crowdfunding is usually seen as where funds are raised solely for charitable causes. The project owners or charity organization provides the relevant information needed by the contributors on the project website.
Contributors make donations not as investors because they don’t expect any profit of reward. Donations are made with the mindset to help the needy and aid the charity organizations to achieve their goals.
Benefits of Crowdfunding
The challenges most SMEs face is the issue of where to get funds to finance their businesses, thereby turning their dreams into achievable realities. Crowdfunding has helped in the area of providing the desired funds needed to start off successfully.
Below are the benefits of crowdfunding.
- The first benefit of crowdfunding is that it bridges the finance gap for SMEs.
- It provides a platform for pre-sales benefits such as product promotion, market research, and advice from the crowd.
- It encourages cultural and social entrepreneurship. When the funds they seek are realistic, it provides the platform for fundraising, social interaction and even cohesion for the contributions.
- It leads to job creation and employment since entrepreneurs are the major creators of labor.
- It also leads to the growth of the economy.
With the benefits above, crowdfunding is an ideal platform for SMEs to get funds but there are still risks attached to the model. There is a high risk of fraud since contributors or investors have no personal interaction with the project owners. They do not have actual knowledge of the business beyond the information provided by the project owner on the website.
The Director General of the Security and Exchange Commission (SEC) released a statement on 15th of August 2016 stating that any crowdfunding activities should be suspended in Nigeria due to the high level of legal challenges.
Despite the risks involved, it is still an ideal platform for SMEs to get funds to make their businesses grow.
Crowdfunding websites in Nigeria
As mention earlier, crowdfunding has not been fully embraced in Nigeria as it is in the United Kingdom, United States, Canada etc. however, there are a few players that are worthy of note.
Below is the list of websites in Nigeria that serve as platforms for SMEs to get funds and make their project dreams come to realities.
StartCrunch
StartCrunch is a funding platform that can be used or accessed by anyone that is above 18 years of age. StartCrunch is managed and registered in Nigeria as First Atlantic Semiconductors & Microelectronics (FASMICRO).
The website is open to anyone that wants to either create or fund a project. When a project is created, the administrator sees if the project meets the requirements before it goes to the public. Their backers are mainly in the US. They provide funds for projects.
StartCrunch invites everyone to start a project and get the necessary support. Visit their website on http://startcrunch.com
234Give
234give seems to be the most healthy and active funding platform in Nigeria right now. They are the first online fundraising platform in Nigeria. They are dedicated to empowering passionate social change makers to raise funds for the projects that develop and uplift their communities. They make it easy, transparent and efficient for investors or contributors to help new business startups with good ideas to turn their dreams into realities.
Their registration process is also easy which can be done on their website at 234give.com. Their vision is to be a sustainable online platform that provides innovative solutions to fund positive social causes and projects.
GoGetFunding
Although Gogetfunding is not really a Nigerian funding website, they are worthy of note because they empower entrepreneurs from Africa and Nigeria in particular. They help individuals and corporation to raise funds for both personal causes and business projects. They are one of the leading crowdfunding websites.
Other Nigerian crowdfunding websites include gogoafrika.com and naijafund.com. These two websites have not been functional for a while now. Gogoafrica has been under construction recently.
How to raise money for business using Crowdfunding Sites
For those considering using crowdfunding to raise funds for their businesses and personal projects, here are some tips on how to raise funds to enable you to turn your dreams into business realities.
- Target the right Audience
Many successful projects on crowdfunding sites target a specific audience. Knowing the right audience for your project is the best way to get funds quickly.
You must target the audience that will be interested in your projects because most contributors or investors only raise funds for a business that they are interested in.
- Craft a good pitch
Having a nice business pitch is one way to rise above the crowd and stand out. Your pitch should describe what the project is all about, specify the benefits and rewards contributors or investors will receive if the fundraising is successful and how it will contribute to the economy.
Investors always want to know where they are investing their money. So, it is important to craft something catchy.
- Choose the right crowdfunding sites that suit your goal
At the moment, Nigerians are limited to only a few websites which have been listed above. In this case, you may not need to choose but know that different websites have their own rules and pattern of operation. Study them and choose the most ideal one for your project.
- Have a great plan on how to spend the money
Most investors, if not all fund your project because of the benefits and rewards they aim to get from the project. No good businessman or women want to lose.
Investors will be happy to fund your project when you have a good business plan and strategy that have the potential of yielding a profit.
When you follow the tips above, you will find it easy to raise funds for your business. There are many project owners out there seeking for sponsors, it is how you package your ideas that will make you stand out and attract the desired attention to yourself.
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