It was not that long ago that aspiring entrepreneurs had to ask a few people to give or loan them large amounts of money so they could finance a business. However, with the inception of crowdfunding, this outdated way of raising capital is quickly being replaced with platforms that allow entrepreneurs to speak with hundreds of investors at once. All of the potential investors only donate a small amount of money to the fund.
This is one of the latest funding innovations of the decade. It means that small business owners who are turned down by traditional lenders pitch their business plans to smaller independent investors. Although this type of financial risk was once limited only to big banks, it is now possible for anyone to invest in a startup business. They can risk as much or as little as they want.
However, there are some challenges associated with this type of endeavor. Regulations are being established in the industry to help find a balance between project creators and investors while also providing an added layer of protection for both. This means that businesses that would probably flop early have a greater chance of success.
Companies that need a large amount of cash may still need to acquire funding through traditional means, but for immediate funding, crowdfunding is an excellent option to get private funding for your projects.
How Does Crowdfunding Work?
Although this is a relatively new industry that is still in the development phase, it is an opportunity for many small business owners to have access to funds that they would not otherwise have. However, it can be confusing because there are so many different ways the platform is presented to entrepreneurs.
These investments, also called donations, are made through an online crowdfunding platform. It is then up to these platforms to coordinate the donations and administer them to the creator of the fundraising project. Projects can range from a community-based project where investors will receive a “thank you” and appreciation to sophisticated business ventures raising money for financial gain.
The Different Types Of Crowdfunding
There are three different types of crowdfunding that allows investors to choose the type of projects they wish to donate or invest in. Donation-Based crowdfunding appeals to people who want to donate simply because they believe in the project or cause that is presented. They are generally rewarded with free gifts, tickets, t-shirts, and other gifts. These donors do not expect anything in return except for recognition.
Debt crowdfunding gives investors the opportunity to get their investments back plus interest. This type of crowdfunding is also known as peer to peer or lend to save. Business owners can borrow money without having to go through traditional lenders. Although there are financial returns for the investors they also get the satisfaction that they have helped a startup business.
Equity crowdfunding allows individuals to invest money in exchange for equity in the project. If the project is successful, the value of the investment increases, but if the project is not successful, investors could lose their money.
If you are interested in funding a project through crowdfunding, thoroughly research the project and make sure that it is something that you are interested in. Also, understand that crowdfunding is an involved process and ask as many questions as necessary before you invest.