Crowdfunding is not a new concept, but it has a new name. It is simply a term for having a group of individuals make small investments. Contrast this to traditional funding when a large institution lends all of the money for a business, organization, or cause.
There a few basic types of crowdfunding that are common today:
Crowdfunding sites: Crowdfunding from crowdfunding sites where people make donations has become very popular. These donations are usually in return for some token from a business. They are called donations because they are not really true investments as the donor gets no stake in the actual business.
Crowdfunding equity: This is a newer type of crowdfunding, and it was only recently made legal under some limited circumstances. Donors actually are investors. Instead of a token, they actually get a share of the small business that they are investing in. Mostly, these deals are only available to high-worth investors.
P2P Loans: Peer to peer, or P2P loans are made from websites that match individual investors with potential borrowers. The total loan might actually come from several of these investors who each contribute a part of the money. In return for their investment in a loan, the borrower is expected to pay back the loan by making regular payments.
The payments include principal and interest. The interest actually gives the investors an income stream. Some people think that P2P loans are risky, but statistics say that most of the borrowers do end up making regular payments. The borrowers need to establish a good track record of paying back their loans if they want to be sure that they can borrow money in the future if they need it.
Which Kind of Crowdfunding Is Right For You?
If you are an individual who needs money to pay for a new transmission, a P2P lending website could be a good alternative. Sometimes small businesses also use these lending sites, but lending limits are usually fairly modest. They might range around $25,000.
Equity crowdfunding is better for companies that don’t mind giving up an actual stake in their business in return for startup money. It is one way to find venture capitalists that are willing to take a risk on a new form of finding for companies that they believe have a chance to succeed. However, the rules make these opportunities open only to fairly wealthy investors.
For artists, small business people, startups, charities, and similar organizations or people, a traditional crowdfunding website might provide the best chance of success. It helps to put out a strong message and offer appealing tokens in return for donation. Beyond sending out the promised tokens, campaigns on a traditional crowd funding site do not need to repay their donations, so this is an advantage over a loan or giving up equity in a company.
Why Is Crowdfunding Popular?
The concept may have grown more popular because traditional finance companies and banks made their own rules a lot tighter. Even so, it gives individuals and small companies an alternative way to raise money.