You are probably familiar with traditional ways of raising capital, such as asking for help from venture capitalists or business angel investors. Business owners have the option to raise money via crowd funding. What is crowd funding?
What is crowd funding? Crowd funding is raising capital through customers, family, friends, and investors on crowd funding sites or platforms. A business owner can use several media and crowd funding sites during the crowd funding process to raise capital.
Crowd funding has the potential to transform financial strategies for many companies and organizations. According to one source, crowd funding could be worth $300 billion by 2025.
You might be curious about who uses crowd funding. There are many types of businesses and organizations that use crowd funding:
- Startups and entrepreneurial ventures
- Businesses in trouble
- Nonprofit organizations
- Individuals who raise money for others (e.g., medical expenses).
- Organizations that seek to pay the costs for animals (e.g., vet bills)
- Community raises capital for projects
Crowd funding platforms
Entrepreneurs spend a lot of time pitching their small business plans, screening potential investors (e.g., venture capitalists), and raising funds to expand their businesses. Crowd funding allows startups and companies to reduce the time required to raise capital online.
A platform is available to entrepreneurs to showcase their pitches and build and share them. They can also present their business plans to large investors.
There are three types of crowd funding platforms: Kick starter, Go Fund Me, and Patreon. Some crowd funding sites may be set up to support specific industries or groups, such as musicians. Some websites may permit funding for various causes, from small businesses and startups to individual fundraising and nonprofits.
Crowd funding platforms typically charge fees for campaigns. You can usually sign up for free. Businesses may have to pay fees for fundraising. These fees can range from 5% to 88% of the earnings. Some websites charge processing fees.
Different types of crowd funding
There are four types of crowd funding: reward, equity, and debt. Below is a list of each type.
Donation crowd funding
Donation crowd funding is a campaign that does not return any financial returns to contributors or investors. Individuals donate to fund a cause or idea.
Joint crowd funding projects based on donations include fundraising for charities, nonprofits, or disaster relief efforts.
Reward crowd funding
Reward crowd funding is where individuals contribute to a business for a reward or incentive. The prize is usually related to your business’s product or services.
Companies that offer tangible goods or products are best suited for reward-based crowd funding. Startups looking to test markets for their product/service can also benefit from reward-based crowd funding.
Equity crowd funding
Individuals can make real investments in private companies through equity crowd funding. By trading capital for equity shares, contributors can become part-owners in your company. Equity crowd funding is a way to give a percentage of ownership to someone else.
Contributors receive a financial return for their investment and a share of the profits in the form of a distribution or dividend.
Entrepreneurs and startups looking for alternatives to venture capital investments love equity-based crowd funding campaigns.
Debt crowd funding
Debt-based crowd funding is where the campaign’s leader borrows money from other contributors. Individuals lend cash to companies. Businesses agree to repay the lenders in return.
Business owners often set time frames to repay contributors. They also include interest rates for repayment.
Debt crowd funding might be a good alternative for entrepreneurs who aren’t willing to give up equity.
Crowd funding has many benefits.
Crowd funding has many benefits, including flexibility and tapping into a larger investor pool.
Crowd funding for businesses has many additional benefits, including the ability to market your business and reach many potential investors. It also makes it easier to raise funds efficiently.
Before you decide to use crowd funding for your business or organization, make sure to weigh all the pros and cons.