Crowdfunding can be a highly effective means of building capital for your business, service or product. However, in order to make it work for you it is important to understand what it is and which variation of crowdfunding might work best for your company or venture.
Crowdfunding is basically the process of raising money from 2 or more people, usually via the Internet. Some of the most popular crowdfunding websites include Go Fund Me, Indiegogo, Kickstarter, Teespring and You Caring.
In general, there are 4 primary types of crowdfunding. It is important to know which type of crowdfunding will best suit your needs. The 4 types are:
- Equity Funding
- Donation Based Funding
- Reward Based Funding
- Debt Funding
Donation Based Funding: This is perhaps the model most familiar to entrepreneurs. Websites like Kickstarter are donation based funding sites. Under this model the investors do not expect anything in return for their investment (i.e. no stock, product etc.) It is essentially "good-will" funding.
Reward Based Funding: This model is similar to donation based funding but in reward based crowdfunding the investors are given a reward for their investments. In essence, in return for investing, backers receive different rewards based upon the amount of funding they commit (defined by the business or entrepreneur behind the project.) In general, donation based and reward based funding models work best with creative, artistic, product based and/or tech projects or companies.
Debt Funding: Debt funding is where lenders are able to provide financing and the lender receives a debt instrument that pays interest return. With debt funding the investor has a secured interest in the company (namely a debt instrument of some type) where the goal is to loan money to the company with a fixed repayment term requiring a specified interest rate during the term of the loan. Examples of debt based funding website include: Prosper, Funding Circle, and LendingClub.
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