Crowdfunding is a way of raising finance by asking a large number of people each for a small amount of money.Crowdfunding uses the internet to talk to thousands – if not millions – of potential funders.
Typically, those seeking funds will set up a profile of their project on a crowdfunding website. They can then use social media, alongside traditional networks of friends, family and work acquaintances, to raise money.
There are different types of crowdfunding which includes Reward, Donation, Debt and Equity crowdfunding.
Donation based Crowdfunding
This is any crowdfunding campaign in which there is no financial return to the investors or contributors. Common donation-based crowdfunding initiatives include fundraising for disaster relief, charities, nonprofits, and medical bills.
Reward based Crowdfunding
People invest simply because they believe in the cause. Rewards can be offered such as - acknowledgements, tickets to an event, regular news updates, free gifts and so on. Returns are considered intangible. Donors have a social or personal motivation for putting their money in and expect nothing back, except perhaps to feel good about helping the project.
Debt based Crowdfunding
Investors receive their money back with interest. Also called Peer-to-Peer (p2p) lending, it allows for the lending of money while bypassing traditional banks. Returns are financial, but investors also have the benefit of having contributed to the success of an idea they believe in.
Equity based Crowdfunding
People invest in an opportunity in exchange for equity. Money is exchanged for shares, or a small stake in the business, project or venture. As with other types of shares, if it is successful the value goes up. If not, the value goes down.
From tapping into a wider investor pool to enjoying more flexible fundraising options, Crowdfunding can be a useful way for organisations or individuals to access finance that banks or other lenders are not prepared to offer.