Crowdfunding: Definition, Types and How It Works
If you want to fund your startup, the easy way to get money is through crowdfunding. But what is crowdfunding? Learn it more here!
What Is Crowdfunding?
When someone needs money to grow their business, they can use crowdfunding, which collects money from many different sources. This approach utilizes the collective efforts of several individuals online using a crowdfunding platform or social media, as a means of reaching them.
4 Types of Crowdfunding
When we talk about crowdfunding there are many different types that you also need to know about, and here we have some of the crowdfunding types below.
1. Donation Based
As the term indicates, contributors who provide money don’t get paid anything from the planned initiative. Donation-based crowdfunding is often utilized for charity purposes such as hospital, school, and orphanage development.
Kickstarter, CrowdFunder, RocketHub and Indiegogo are a few instances of crowdfunding sites that accept donations. GoFundMe, GiveForward, FirstGiving and YouCaring.com are examples of donation-based crowdfunding systems used to raise money for charitable purposes. The typical cost for these services is between 5% and 10% of all donations.
2. Reward-Based
In this type, those submitting proposals usually provide an offer in the form of a gift or other compensation in the form of goods, services, or a right, instead of sharing the profits from the project. This style of crowdfunding is typically only used for creative projects like games, where donors who finance the project will receive enticing game-related extras.
3. Debt Based
This sort of crowdsourcing is equivalent to a traditional loan. Potential debtors will submit plans, and donors or creditors will deposit capital, which is treated as a loan with interest payments.
The advantages of this kind of crowdfunding is there are no more commitments you owe the lenders. Long-term, this can increase the business’s profitability. Debt-based crowdfunding typically has interest rates that are lower than those provided by banks and other financial institutions.
4. Equity Based
The idea is the same as with shares; in exchange for dividend payments, the money invested will transform into equity, or a share of ownership in the firm.
How does it work?
Many of you still don’t know how crowdfunding works. We’ll make an effort to explain it simply so that you may comprehend it with ease. It is a loan given by investors to people who want to start a business. That way, the startup that you want to develop can go according to plan. However, of course, there are other several types of funding as we have mentioned above.
This kind of thing will usually have an agreement that will later be useful for both parties so that later all parties will not be harmed. To apply for this kind of capital, you need details about the business that will be developed, for the expected results. In addition, with a good development plan, it will be easier to obtain capital.
Understand About Crowdfunding?
That’s all about crowdfunding that we can share with you all the readers around the globe. Hopefully, this could bring a piece of new information that will be useful in the future. If you plan to start a start-up make sure to understand what is start up and how does it work.
