Crowdfunding – The Basics
What is Crowdfunding and what can it be used for?
Crowdfunding is a way to raise money for a project, either business or personal, by inviting a large number of investors to support it rather than borrowing money from a more traditional lender which can be both more expensive and more restrictive.
Crowdfunding can be used to raise funds for any kind of project. The most popular type of crowdfunding is donation or reward-based crowdfunding. It is also possible to use equity-based crowdfunding where the investor gets shares in the company in return for their investment.
What Are the benefits of crowdfunding for the borrower?
The benefits of crowdfunding include the ability to raise money from people who are not related or connected to each other or to the borrower in any way. This can be helpful if the borrower does not have many connections or the kind of track record or security demanded by more traditional lenders. The borrower will have access to a much larger pool of potential funders than they would if they were just trying to get money from family and friends.
In addition, it is often free to set up and maintain an account on most crowdfunding sites (which means that there are no upfront costs). This means that crowdfunding could be an affordable option compared to the costs of raising a loan.
What are the benefits of crowdfunding for the investor?
Crowdfunding campaign can be a great way for a investor to spread the risk, and often get higher returns than savings accounts particularly if you only have smaller amounts to invest.
Crowdfunding is also beneficial for the investor as you are often able to invest in projects they believe in, knowing their contribution will help make it happen.
What are the disadvantages of crowdfunding for the borrower?
Crowdfunding is an internet-based funding technique for raising money. It is often used to help fund projects, start-ups, and creative endeavours by the general public.
If the project doesn’t reach it funding target then they borrower will get nothing, so the targets must be chosen wisely. It is always wiser to go with one of the more reputable and well known platforms to ensure that you do get the money pledged. Different platforms specialise in different forms of crowdfunding so it is wiser to go with one that matches your aim – a reward based platform would not be a good fit for a project offering equity or investment involvement to lenders.
What are the disadvantages of crowdfunding for the investor?
Crowdfunding is a new way of fundraising that has been around for the last decade. It’s a way for people to back projects you want to see come to fruition. However it is risky and you may not receive the projected returns so it is always wiser to only invest money you can afford to lose.
The main disadvantages of crowdfunding for the investor are:
- There is a high risk of losing all your money if the project fails.
- Lack of control, Investors don’t have any control over how the money is used and what happens with it. There is little opportunity for direct input on the part of the investor
- You need to ensure that the type of crowdfunding you invest in is appropriate to the returns you want. Reward based crowdfunding is of little use to someone wanting an income from their investment.
What are the types of crowdfunding platforms?
- There are many types of crowdfunding platforms. The most common are donation based, reward-based, equity based and lending based.
- Donation based Crowdfunding -These platforms offer fundraising for individuals or organizations in need. They usually take a small percentage of the donations for their service fee, a good example is GoFundMe.
- Reward based Crowdfunding – This type of platform offers products or investments to potential backers in exchange for their donations. The backers will not be able to get their money back if they do not receive the product or investment they were promised at the end of the campaign period. Examples include Kickstarter and IndieGoGo.
- Equity based Crowdfunding – A form of crowdfunding that can be utilized by start ups and entrepreneurs as a way to raise capital. It is similar to the more traditional rewards-based crowdfunding, but instead of receiving a product or service in return for their contribution, backers receive an equity stake in the company they are funding.
- Lending based crowdfunding – like more traditional lending where a borrower offers an interest bearing loan to the lender as a reward for their investment.
How do you select a good project to back on a crowdfunding platform?
There are a few things to consider before backing a project on a crowdfunding platform. The first is the project’s goal, and whether you think it’s realistic. The second is the project’s timeline. If it seems too long or too short, that could be a red flag. The third is the rewards offered to backers, as well as the risks involved in receiving those rewards.
You can also look at how many other people have backed the project and what they have to say about it on social media platforms like Twitter or Facebook.
