Did you know that crowdfunding is expected to hit a record high $34 billion in 2018?
Previously, most startups firms financed their businesses by borrowing loans from friends and banks or by using personal savings. Currently, most of them have step by step adopted crowdfunding to finance their operations. As an entrepreneur, you no longer have to apply for bank loans. Instead, you can seek funds from financiers such as Angel Investors or Venture Capital firms.
What Is Crowdfunding?
Crowdfunding is a technique of raising money by requesting many people to contribute a small amount each. You can use it to build capital for different reasons such as charity, financing an idea or searching for investors. It helps in solving most startup money challenges.
Types of Crowdfunding
There are three major types of crowdfunding;
A donation involves asking donors to offer startup funding through crowdfunding platforms. Most of the people who use it aim at raising money for non-profit making organizations such as a charity. You can get a donation from Crowdrise or GoFundMe.
In this system, for every investment made, one is rewarded. They often pledge to offer a certain amount of money. The reward can be products or services. For instance, if one donated money to an entrepreneur interested in launching a unique board game, they can receive the board game in return.
Although it is an easy way to get small business funding, people who receive the reward from an enterprise are not considered as real investors. Therefore, if a business flourished, the reward-based investor can’t earn similar profits like those from a traditional investment.
As a result, it discourages some people from investing their savings in such an enterprise. However, they aren’t compelled to contribute vast amounts of money. There are several reward crowdfunding platforms such as Indiegogo and Kickstarter.
Equity funding is a modern method of raising startup money. The JOBS Act restricts firms from collecting over $1,000,000 per year through websites. Therefore, those who contribute funds can be listed as company shareholders.
The Ultimate Crowdfunding Guide from Banking Sense states that if one is interested in equity campaigns, their investment should be incorporated. It enables you to enjoy the JOBS Act’s freedoms such as an unlimited number of investors in a C corporation. However, it restricts an S corporation to a maximum of a hundred shareholders. Besides, the crowdfunding guide aids investors in deciding an ideal funding campaign for their business.
Different Crowdfunding Sources
When picking out a funding platform for your business idea, you should select one that is compatible with your primary objectives. For instance, if you intend to create a community without offering the investment’s equity, you should choose a reward-based funding website.
There are a variety of funding sites:
Kickstarter: It is a popular reward-based website that has been operating since 2009. The platform has a high success rate than most of its rivals. It has collected pledges worth over three billion dollars.
To use it, an investor first creates a business idea and plan. They then upload them to the website having a clear financial goal. If people believe in the investment, they contribute money. It doesn’t entail sophisticated capital application processes.
Crowdfunder: The website was launched in 2012. However, due to its distinct business model; it has caught the attention of some investors. Unlike Kickstarter, the platform allows people to buy stakes in the firms that they finance. Moreover, it will enable an entrepreneur to create a free profile. However, they have to pay a monthly subscription fee before getting startup funds.
Benefits of Crowdfunding
Convenience: One doesn’t have to have excellent speech presentation skills. In the past, companies had to prepare and present beautiful presentations in front of audiences. However, with crowdfunding, they just have to make online business presentations.
Broad audience: Before the introduction of crowdfunding, most business rarely got first-time investors. People we naïve in taking such substantial financial risks. However, crowdfunding only requires you to get contributions from like-minded people hence providing you with a broad audience.
Social media exposure: It enables one to get an online audience of donors. Various crowdfunding campaigns help many entrepreneurs meet their financial goals.
Crowdfunding has a significant impact on how startups raise small business money. Through it, you can get funds without applying for bank loans. Besides, it mostly exposes a business to different clients from distant places.