Advantages and Disadvantages of Crowdfunding in 2025

Crowdfunding is a new, legitimate way of raising money for business owners. Crowdfunding has helped many entrepreneurs achieve their business dreams by allowing people with internet connections to contribute.

Nevertheless, crowdfunding has its benefits and drawbacks. It is one way to raise much-needed capital for projects. However, before considering crowdfunding as an appropriate way to raise money, knowing its potential and pitfalls is essential.

Keep reading and discover everything you want to know about crowdfunding to make informed decisions.

What's Crowdfunding?

Crowdfunding is when people raise funds online through donations or sales of financial instruments. The funds can be used to start a business idea or specific projects.

This fundraising method gradually became prominent since the 2005 launch of Kiva, an Internet-based communal fundraising Site. Anyone with an internet connection and residing in a country where crowdfunding sites are allowed can create a crowdfunding campaign.

Some business owners seek seed capital for their new business through crowdfunding, while others seek to expand it. Crowdfunding is also used by artists and other creatives to help fund creative projects and by people raising money for other causes. Crowdfunding is predicted to hit $28. 2 billion globally by 2028 from $13.5 billion in 2021.

One significant benefit of crowdfunding is it can replace debt financing and, consequently, the interest costs of a bank loan. However, if not managed well, it can still present some challenges. Crowdfunding requires time and effort to ensure that the right strategies are in place and that the crowdfunding process is well-coordinated.

A campaign usually lasts a month or two and is supposed to raise a set dollar amount. To create the first campaign page, you must have a marketing and promotional strategy. You must also find websites to host your campaign, create a pitch video, and develop a system to motivate people to donate.

Types of Crowdfunding

There are four types of crowdfunding. Let's explore these types and the platforms that offer them:

1. Rewards based crowdfunding

Reward-based crowdfunding is a type of crowdfunding in which the start-up founder gives donors gifts in exchange for a donation. Indiegogo and Kickstarter are among the most recognized rewards-based campaigns. Reward-based crowdfunding structures indicate different levels of gifts equivalent to or less than the dollar amount of the contribution.

The larger the pledge, the better the gift. They could be materials such as T-shirts, branded items, special invitations to events like a live meet with the artist, opportunities to be among the first to use the product, or a party to launch the product.

Typically, rewards-based crowdfunding services charge a cut of the funds raised, which is mostly in a frequency ranging from 5% to 8%. Kickstarter refunds every donor if the funding amount is not raised and takes no commission; the business owner also does not get any funds.

On the Indiegogo platform, the business owner can collect the money even if the financial target was not achieved.

2. Debt-based crowdfunding

Debt funding crowdfunding refers to friends and supporters providing your business with capital like a loan. If you are getting funds, you must promise to assign a particular amount back to the individual investors, plus interest for certain projects.

This crowdfunding method can be less time-consuming and complicated than getting a loan from the bank, especially for those with low credit ratings, which negatively impact their chances of getting a loan.

3. Equity-based crowdfunding

Equity-based crowdfunding means that the pledgers become investors and receive stock in the company as a reward for the pledge. Wefunder is an example of an equity crowdfunding site. The founders commonly use this crowdfunding type to start or expand social projects or business ventures.

Equity crowdfunding is legal, allowing start-ups to issue securities online. Small business owners must follow numerous legal requirements, including restrictions to raising a maximum of $5 million in 12 months.

4. Donation based crowdfunding

Some individuals contribute money to donation-based crowdfunding. People mostly use this method to address professional or personal hardships instead of raising capital.

Donation-based crowdfunding donors don't receive equity, rewards, or benefits. GoFundMe is an example of a donation-based crowdfunding channeling money towards expensive medical treatment or rebuilding after natural disasters to complement insurance claims.

Advantages of Crowdfunding

There is no shortcut to raising capital, but crowdfunding offers these advantages.

1. You don't need a credit score

When seeking a bank or financial institution loan, a business credit score or a nonexistent or low personal credit score becomes a barrier. However, this isn't an issue in crowdfunding platforms, such as reward-based platforms, because you don't need to post your credit score when launching your campaign.

This means crowdfunding remains ideal funding even when you're credit-invisible with no credit history and want to start or expand your company.

2. Create organic customer following

Crowdfunding is a great way to create a customer base and develop engagement. Donors to these campaigns become loyal customers because they've been on the entrepreneurial journey from the start. This allows you to naturally develop relationships with your customers without using marketing campaigns or paid advertising to engage them.

3. Functions as proof of concept

Proof of concept shows that the project or the business idea can work. The pace at which donors contribute to a campaign indicates a business's proof of a concept and potential demand. Usually, if the project gathers funds before the due date or if the people raise the funds to surpass the base goal, then it is a sign of proof of concept.

4. Fund from multiple sources

If your crowdfunding campaign succeeds, you will have numerous investors, some of whom could be angel investors, when you're prepared to expand. Multiple sources of funding are advantageous in case an investor backs out. 

5. Free marketing

Suppose your business idea is captivating, and your campaign page is persuasive. In that case, your crowdfunding effort can be a remarkable marketing tool that generates online and social media publicity, from media coverage to viral posts. High-traction campaigns can attract investors.

Monitoring your campaign data, such as conversion rates and total funding, is vital. 

6. No interest cost from the bank loans

Crowdfunding is an excellent way to raise funds instead of taking expensive bank loans or going into debt. Interest rates for bank business loans range from 5. 26% to 11. 32. Crowdfunding platforms are free. Many deduct their platform fees, which may range up to 5% of the funds raised, plus processing fees, while the costs of repaying most bank loans can be significantly higher.

7. A quick way to raise capital

Most crowdfunding campaigns last a month or two and require several weeks of preparation. This makes it quicker for entrepreneurs to access funds than pitching to venture capital companies or banks.

It might take several months for a small business to source for a loan, as well as plan, process, and receive cash. Pitching a VC firm, getting the response, and closing the deal can also take a few months. You must have a scalable start-up and know someone in the right circles to be introduced to a VC.

This rules out most small business operators without the right connections, which would lead to a colleague referral or lack of the capital base needed to expand the business.

Disadvantages of Crowdfunding

Although crowdfunding has mentioned advantages, it also has a few drawbacks, including:

1. Missing funding target

You may miss reaching your funding target even with the most compelling business ideas and a well-planned crowdfunding campaign. Kickstarter will return the money to the donors if the funding doesn't hit the target, while Indiegogo will give you the donations even if the target isn't achieved. Therefore, review the crowdfunding company policy before launching your campaign. 

2. False positives

These campaigns can portray false positives: the outcome of a campaign could serve as evidence that the idea that is popular among people is not equal to having a lot of sales. On the other hand, a failed crowdfunding campaign does not mean one has a bad business idea. It is just that one has not done a good job when conducting the campaign.

3. May give equity in return

If you choose equity-based crowdfunding, you will give up percentage ownership of your business, no longer owning 100% equity. As an entrepreneur, you will decide the stake you will give up and the dividend offered based on the platform rules and regulations. But if your equity-crowded business fails, the investor will lose their investment. 

4. Time commitment

Despite crowdfunding's minimal financial risks and low cost, the process can take a long time from development to execution. You must create visual content such as high-quality photos and short videos. Also, develop a structured reward program, create newsletter updates, and create compelling social media posts.

5. Paperwork and Preparation

Equity-based crowdfunding requires you to adhere to the rules and regulations set forth by SECs. Fill out the FORM C offering statement via the SEC electronic EDGAR portal. Other forms you must fill out are FORM C-U and FORM C-AR, which you fill out at the end of the funding period.

6. Minimal professional guidance

As an entrepreneur who is fundraising through crowdfunding, you may need to build your own sources of support. You will get the support of professional direction and expertise, like venture capitalists. To fill the gap, search for industry-related events, enroll in professional groups or contact potential mentors for guidance.

7. Low success rate

Crowdfunding has a low success rate. For instance, Kickstarter's success rate is about 40.62%, meaning that out of 100 projects, only 40 campaigns will receive funding.

8. Potential for intellectual property theft

Business ideas presented in crowdsourcing platforms are extremely fragile as these ideas are set in the public domain of the global village. Communicate with a lawyer to help clarify any potential IP issues that could be problematic for you, what risks are manageable for your situation, and how.

Vital Considerations Before Starting a Crowdfunding Campaign

Things you should consider before starting a crowdfunding campaign of any type.

1. Choose the right crowdfunding platform

There is a wide range of crowdfunding options; choosing one to apply this model is challenging. Choose a platform that will work best for your project regardless of the type. For instance, if you have a vision of a new business you want to start to finance, the debt or equity crowdfunding route would work for you.

Are you planning a new product? Rewards-based crowdfunding offers initial sales and upfront investment. After choosing a particular crowdfunding category, it is time to research the available platforms. Compare and contrast their services, requirements, reputation, and fees. Also, look at past success stories.

2. Safeguard your intellectual property

If you promote a new product or service idea on a crowdfunding platform, another person may steal it. If they can get it to the market before you, it might result in a lengthy and costly legal battle. To prevent this, you might want to look into ways to acquire copyrights, patents, or trademarks.

3. Invest in marketing

To raise funds through crowdfunding, you must share your story compellingly. You need high-quality videos, photos and content before launching your campaign. If you don't have marketing skills, you need to hire an expert to help you with your campaign.

4. Leverage your social network

Your crowdfunding campaign success will depend on your ability to reach more people. Use your professional and personal on social media platforms. You may also ask your loved ones to share the campaign to spread the word further.

5. Understand the tax implications.

Before launching your campaign, understanding how crowdfunding contributions may affect your end-of-the-year tax bill is essential. Remember, the IRS will treat the contribution money as an income during the year you receive it.

However, your situation may differ, so you should consult an attorney, accountant, or tax specialist.

Crowdfunding Industry Regulations

One of the most significant issues discussed in connection with crowdfunding is the necessity of its regulation. Some have said that the authorities should intensify its regulation to protect investors.  

Others think it is not very appropriate to regulate it too much, which will hamper the development of the industry. Today, most countries have implemented some crowdfunding-related regulations. However, the differences in the rules and norms are vast.

For instance, crowdfunding platforms in the United States are compelled to register with the Securities and Exchange Commission (SEC). Furthermore, investors must be provided with specific information about the business before making an investment decision.

The regulatory environment of crowdfunding is a significant factor businesses need to consider. Hence, despite the positives likely garnered from crowdfunding, businesses must also consider the risks of participating in unregulated markets.

Similarly, business owners' legal responsibilities while campaigning on crowdfunding platforms should not be overlooked. So, ensure you adhere to your country's laws and regulations. In this way, enterprises can guarantee that they work in safe conditions and exclude the unfavorable outcomes related to crowdfunding.

Bottom Line

Crowdfunding is a permanent fixture with unbeatable potential to revolutionize business capital acquisition. Although the method is associated with risks, it offers numerous promising benefits. As the industry thrives, it will evolve, yielding new opportunities for entrepreneurs and investors. Kindly contact one of our experts here if you have any question on crowdfunding.