What Is Crowdfunding?
Crowdfunding is composed of sponsors, followers and platforms. It’s a financing method with the features of low threshold, diversity, popularity and creativity.
Compared with traditional financing methods, crowdfunding is more unrestricted. All favoured projects can obtain initial funding through crowdfunding, which provides an efficient way for startups to grow their businesses.
Types of Crowdfunding
- Debt Crowdfunding
- Equity Crowdfunding
- Donation-based Crowdfunding
- Reward-based Crowdfunding
“Nowadays, more people are choosing to start their own businesses. However, financing is difficult for many small businesses. As a low-threshold financing model, crowdfunding profits everyone by helping entrepreneurs successfully overcome the financial difficulties and enabling the masses to participate in.”– Robert Palmer CEO
Debt crowdfunding, sometimes known as peer-to-peer lending or loan-based lending, is an alternative way for businesses to borrow money. In essence, it’s the same process as the traditional model of applying to a bank for a business loan. The main difference is that the finance is raised via a crowdfunding or P2P lending website, and the funds are contributed by multiple investors. It can be attractive to those seeking an alternative lending route for businesses which have been unable to raise finance via banks or credit unions.
How many credit cards can a founder open before overextending their ability to pay on time? Lucky for entrepreneurs, there is now another alternative that entrepreneurs can utilize to access capital: equity crowdfunding.
In essence, equity crowdfunding is raising capital from the crowd through the sale of securities (shares, convertible note, debt, revenue share, and more) in a private company (that is not listed on stock exchanges).
Donation-based crowdfunding is a way to source money for a project by asking a large number of contributors to individually donate a small amount. In return, the backers may receive token rewards that increase in prestige as the size of the donation increases. For the smallest sums, however, the funder may receive nothing at all.
Sometimes referred to as rewards crowdfunding, the tokens for donations may include pre-sales of an item to be produced with the funds raised. Donation-based crowdfunding can also be used to raise funds for charitable causes.
Because this sort of crowdfunding is predicated on donations, funders do not obtain any ownership or rights to the project—nor do they become creditors to the project.
Business owners describe their project or business idea and fundraising goal on a crowdfunding platform. In return for donations, businesses provide rewards. For example, a jewelry designer might reward everyone who contributes $100 with an original handmade bracelet or an inventor of solar-powered lawn mowers might give a mower to contributors at the $1,000 level.
Rewards don’t have to be substantial; some businesses offer a simple handwritten thank-you note as gesture.
This type of financing is geared toward startups, particularly in creative fields, that don’t qualify for traditional small-business loans but have compelling projects or to test a market.