Crowdfunding by definition is when a group of organizations, businesses, or individuals fund a venture or project using small donations from a large number of people. After receiving a significant cash infusion, ventures can take off or even set new projects in motion. Internet platforms are the usual gathering places for these investors. People usually launch these projects online, with disclosed monetary goals and a set time frame. In this article, we will tackle the different types of crowdfunding that can be utilized for your business, along with the many benefits of this type of funding method.
You can use four types of crowdfunding for your business ventures and each of them receives money from interested donors. There is donation-based, equity funding, debt-based funding, and reward-based funding.
Let’s Break These Crowdfunding Methods Down
Donation-based crowdfunding is when a company, campaign, or person receives money without the obligation to return it. These individuals donate the money to you out of support and in hopes that the company/project/person they are funding will experience growth and abundance. Contributors give money without receiving anything in exchange for it.
Debt-based donations are based on P2P (peer-to-peer) lending, which is only another form of crowdfunding. In these kinds of donations, backers pledge a certain amount of money as a loan and expect repayment with additional interest. All this by a certain preordained deadline.
This is based on donors receiving a certain reward in return for their generous donation. These rewards can vary in size and type, which encourages higher financial contributions. The amount of money invested in a specific campaign, company, or person by crowdfunding participants, serves as an evaluation system based on which rewards are given to crowd funders.
Last but not least, some campaigns do not support backers owning portions of a certain company, equity-based crowdfunding occurs when a startup or a small business gives away a fraction of their business in exchange for capital. These types of donations are an investment indeed and participants receive company shares in return, all based on the amount of money they contributed.
Whichever type of crowdfunding you choose, you should be aware of the multiple upsides of putting your money into a crowdfunding project, as an investor. Firstly, low-risk ventures are always highly appealing to investors and crowdfunding offers just that. It is not a part of the financial market, the state of the economy or the stock market does not affect the investments.
Investing in a crowdfunding campaign is relatively easy since investors can put their money into their chosen project, executed online. In addition, there’s flexibility and multiple direct payment options and investors can use it to further diversify their investment portfolios. Lastly, equity crowdfunding enables investors to fund multiple projects simultaneously, which helps further expand financial opportunities.