Did you know that crowdfunding has emerged as a go-to option for many aspiring entrepreneurs today? The truth is crowdfunding may soon be replacing traditional business-financing sources like venture capital, bank loans, and angle investors. It refers to a unique way of collecting funds that is expected to grow in popularity. Reports suggest that by 2025, yearly donations from crowdfunding will reach almost $28.8 million. So, why is crowdfunding such an appealing prospect for businesses?
Types of Crowdfunding:
- Donation-based crowdfunding: This is unarguably one of the best-known types of crowdfunding where the request is for small donations from a wide network of people. The funds are typically for a project that may be close to your heart. It is therefore meant for charities or for bringing together a community online to allow them to make donations to any project. This type of crowdfunding works best when you need to raise funds for community-based projects or personal needs; you may share the fundraiser details on social media or with your personal network to create more awareness and bring in more donations.
- Reward-based crowdfunding: This type is quite common and used for raising money for a new business or startup offering a service or product. Investors can contribute to their own ventures in exchange for non-monetary benefits through the reward-based crowdfunding model. It is best suited for creative projects; the more an investor donates to a fund, the more rewards he stands to get. These rewards may be in the forms of free gifts, prizes given by partner companies, handcrafted items, tickets to events, etc. For example, an artists who need crowdfunding to launch a gallery may reward investors with replica prints or signed artwork. Rewards crowdfunding helps to build fans that are keen to support your business; so, may established businesses use crowdfunding for testing products with audiences to check if these will resonate with them when launched.
- Equity crowdfunding: This is popularly called investment crowdfunding or crowd equity and is perfectly suited for small companies and medium-sized enterprises seeking a lot of money for scaling their business or for launching a new business. The equity crowdfunder is eager to invest money in exchange for company shares or stakes in the project or business in question. So, this type of funding makes sense for companies driven by growth and in areas where return potential is high. The stake or shares that the equity crowdfunder is entitled to depends on the kind of business, but this is an interesting way to raise money without going into the hassles of accruing business loans.
- Debt Crowdfunding or crowd lending is an easy and quick way to raise funds by both businesses and individuals whenever there is a need for finance. Investors can finance projects in exchange for interests on their investments. So, as a business owner, you can get money you need for lower rates of interest compared to what banks offer. It is sought by businesses that need money and prefer to repay funds rather than offer equity.
- Real estate crowdfunding: This is a popular option for investors keen to invest their money into real estate rather than going through traditional bank loan hassles. Here, an individual will raise funds from investors for paying for a large property such as a condominium building. Investors have the flexibility to pay for smaller amounts depending on how much property they want to own and they receive payouts every quarter according to revenues the property makes.