Crowdfunding has become a viable form for funding a venture, project, cause, event and much more. For small businesses looking to bypass traditional sources of financing such as bank loans, angel investing or venture capital, it is now a great option.
If you’ve been thinking about starting a campaign, it is important to note there are different types of crowdfunding. And this doesn’t mean the platform or portal such as Kickstarter, Indiegogo and others.
The confusion stems from clumping crowdfunding under one umbrella, when in reality there are different types or models. Depending on your project, choosing the right model for your small business is critically important to ensure the success of your campaign.
Types of Crowdfunding
So before you get started, here is a quick primer on the different types of crowdfunding.
When you talk about crowdfunding, the rewards-based model is what most people are familiar with. This is in great part due to the popularity of platforms such as Kickstarter and Indiegogo.
This type of crowdfunding is used to launch everything from ideas of a product to fully functional prototypes looking to go into full production. For the investors or contributors, the reward is getting to buy the item at a much lower price before it becomes available to the general public along with other incentives
In addition to a discounted price, businesses also offer meeting with founders, trip to company headquarters and more.
Rewards-based crowdfunding has multiple benefits for a small business. This includes access to cheap money because you don’t have to pay interest or dividends on the investment.
With the right platform, the campaign also serves as a marketing tool for the product. Early adopters become advocates who grow its popularity with word of mouth promotion. This is so effective, big brands are now introducing products with reward-based crowdfunding to test them before they launch it.
As the name implies this model sells off small shares or equity of the business to investors with the goal of delivering returns if the business succeeds. And of all the types of crowdfunding, it is the most complicated of the bunch.
Equity crowdfunding can be used by any startup, but it is best suited for more established firms looking to expand and raise large sums of capital for their next stage of development.
Businesses who launch equity campaigns have minimums which are much higher than the other types of crowdfunding. They can start anywhere from $500 to $1,000 and go much higher.
The complexity lies in the SEC compliances businesses have to abide by when using equity crowdfunding. This includes disclosures such as financial statements, tax returns, price of the sold securities, and more. And this is why experienced businesses should use this model to raise funds with equity crowdfunding.
Another potential problem is you will be selling a part of your company. If you don’t want to answer to outside investors and all it entails, this might not be the right vehicle to fund your enterprise.
Peer to Peer or P2P Lending
As a crowdfunding model, peer to peer or P2P provides personal unsecured loans to small businesses or individuals. The P2P platforms bring together lenders and those looking for a loan.
If you are a small business looking for an alternative lender, P2P provides a solution.
The amount of the loan and interest rates depend on whether you are an individual or a business. Based on the platform individuals can apply anywhere from $1k to $35K or more, while small businesses can ask from $15K to $350K or more.
The interest rates may depend on the loan grade, your credit, platform and other factors. As any other loan, make sure you fully understand your liabilities before you apply.
As one of the types of crowdfunding which deal in lending money, P2P platforms have to abide by state regulations. This is why P2P lending is not available in all states. So, before you get going, make sure your state allows P2P lending.
Peer to Business or P2B Lending
Peer to business or P2B works the same way as the P2P model, but it specializes in loans to businesses.
This is one of the relatively new types of crowdfunding, but it is gaining traction because it gives small businesses yet another funding solution.
Just as the P2P model the amount and interest rate also depend on a variety of factors. Because the loan is given to businesses, lenders in most cases want an established company with collateral.
This might not be for everyone, but if you need quick cash with manageable interest rates, take a look at P2B crowdfunding.
If you happen to run a not for profit organization, a donation-based crowdfunding is a great option to support the causes you are passionate about.
Unlike the other types of crowdfunding, the goal here is to help a cause. This can be issues affecting your community, city, state, country or the world for that matter.
With this type of funding the contributors don’t get a product or shares of the company. This type of crowdfunding is another channel to highlight a particular cause and get support from like-minded individuals or organizations who believe in it.
What is Crowdfunding?
Even though it seems like there are many different types of crowdfunding, they are basically the same thing. They take money from individuals and make it available to people and businesses looking for funding.
Where they differ is in the implementation of the funds they receive from their contributors/investors and the segment they address.
For small businesses who want to launch a new product, get a loan, or support a cause it means they no longer have to depend on banks to make it happen. Crowdfunding is a real option.
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Business owners are lucky that they now have this option. They can now fund their ideas without solely relying on banks.