Types of Crowdfunding for Your Business
What is Crowdfunding?
Crowdfunding means the idea of collecting small amounts of capital from a large number of people. It is typically done on websites that connect businesses, nonprofits and creative projects to people who are interested in supporting them and are willing to provide to the entity. These funders may or may not expect something in return for their funding.
Reward-Based Crowdfunding
Rewards based or seed crowdfunding is a type of financing where entrepreneurs receive financial donations in exchange for a product or service. Business owners pitch their ideas and goals on a crowdfunding platform and in return for donations they receive, the business provides rewards. Such type of financing is geared towards startups in the creative industries that don't qualify for traditional small- business loans but have compelling ideas.
For example, a musician you like may use crowdfunding to produce their next album. They make a Kickstarter page for the new album, outlining the basic ideas they have for it, and explaining what they’ll use the funds for. You (along with other fans) contribute $10 to the project. In return, you will receive a digital copy of the album when it’s done.
These crowdfunding efforts often involve tiered rewards. To return to the music example, a $10 donation may earn you a digital copy of the album, but a $20 donation may earn you a vinyl album.
Peer-to-Peer Lending
Ever loan small amounts of money to a friend or relative? Platforms like Lending Club and Prosper apply that same concept to crowdfunding. This enables borrowers to get access to funds outside of traditional banking channels. People willing to take a little risk to lend money to other individuals can create whole loan portfolios at the click of a button.
Donation-Based Crowdfunding
Crowdfunding sites are also used by nonprofits seeking donations. Donation based just means donors don't get anything in return. Businesses can use donation based platforms like GoFundMe too, not just non profits. These platforms GoFundMe give organizations a free platform to raise funds for their causes. Instead of taking a cut of their donations, GoFundMe asks contributors directly for a donation to help keep the site running.
Contributors who give through sites like GoFundMe don't usually expect anything in return. They're simply contributing to a cause or organization that they support.
Equity Crowdfunding
Equity is the amount of capital invested or owned by the owner of a company. The equity is evaluated by the difference between liabilities and assets recorded on the balance sheet of a company. It is the smallest slice of the crowdfunding pie, nonetheless, it has the potential to change the way individuals invest their money. Equity crowdfunding enables investors to make real investments in private companies.Â
Real Estate Crowdfunding
This type of crowdfunding combines the concepts of real estate investing and crowdfunding. This method utilises crowdfunding to raise capital for real estate investments. Through such financing, investors have the ability to invest in a variety of properties without having to deal with mortgage brokers, real estate agents or contractors.
How/where to crowdfund successfully?