types of crowdfunding

The Different Types of Crowdfunding and How They Work for You

Elena Hudgens
By Elena Hudgens 10 Min Read

Crowdfunding is a small sum of money raised from a larger group of individuals. It has become increasingly prevalent over the past decade. It is now used as an alternative funding source by entrepreneurs, startups, or even regular people looking to grow their businesses. The practice is done with physical and virtual (internet) platforms, primarily on websites and apps. When you have funders like angels or VC funds on your side, they’re considered more traditional because they come from one source/few sources. In contrast, there might be many smaller ones with crowdfunding, but it’s possible to raise significant amounts when this method works out for you.

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Entrepreneurs can use various types of crowdfunding websites to raise funds. These sites allow fundraisers to interact directly with the crowd to raise money for a project. While there are many various types of crowdfunding, this funding source typically requires entrepreneurs who plan on creating a new product or service to have a pitch ready if they want their campaign goal met. In this article, we will discuss types of crowdfunding prevailing in today’s era and could be considered helpful for crowdfunding!

Benefits of crowdfunding

There are numerous advantages to crowdfunding, the most significant of which is the extensive range of different forms of crowdfunding available, ranging from donation-based to rewards-based crowdfunding. You should identify a type of crowdfunding that meets your company’s fundraising requirements. It is feasible to obtain funds without giving up equity in your firm if you employ the correct sort of crowdfunding.

Crowdfunding is a terrific approach to build momentum for your startup and brand if you haven’t yet received investment from angel investors or venture capital firms. A successful crowdfunding campaign should make obtaining further funds easier in the future.

Another significant advantage of using crowdfunding to raise funds is that it should assist you in expanding your market. People that donate money to your crowdfunding campaign are usually interested in being early adopters of the idea or product you’re developing. These people should operate as a built-in market once you’ve used the funds for their intended purpose.

The following are some of the types of crowdfunding that your firm can use:

  • Donation-based crowdfunding
  • Rewards-based crowdfunding
  • Equity-based crowdfunding
  • Debt-based crowdfunding
  • Royalty-based crowdfunding
  • Real Estate crowdfunding

Now let’s go through types of crowdfunding one by one

1. Donation-based crowdfunding

Donation-based crowdfunding is one of the various types of crowdsourcing that includes raising large sums of money without providing anything back to the investors. This type of crowdsourcing is frequently utilized to support charities and social concerns.

Donation-based crowdfunding is used to raise money for personal needs and community projects that need funding. You can share your fundraiser with your network and social media to amplify awareness of the cause. 

Some examples of donation-based crowdfunding include raising funds for medical expenses or an unexpected financial crisis or raising funds for a local project like a new park.

2. Reward-based crowdfunding

Individuals contribute to a business in exchange for a reward, which is often a form of the company’s product or service.

The distance between the inventor and the investor is irrelevant in this form of finance. Non Equity crowdfunding has many elements of rewards-based crowdfunding.

This form of funding is widely used in various situations, including free software creation, film marketing, scientific research, civic endeavors, and new technologies.

3. Equity-based crowdfunding

Equity crowdfunding allows investors to become part-owners of the company by trading capital for equity shares. In this case, the investor receives a financial return in proportion to their contribution as dividends or distributions from profits when they are earned at some point. This is one of the most popular forms of crowdfunding!

If you have a small business that needs capital, equity-based crowdfunding can be an option for you. It lets your investors make requests to view certain financial documents, and they can also ask permission to see other things such as sales or marketing data from previous years. Depending on the type of campaign and how long it lasts, funding will take anywhere from 2 months to 4 months.

4. Debt-based crowdfunding

Debt-based crowdfunding is one of the various types of crowdfunding that allows you to raise large amounts of money without giving up any of your company’s equity. These campaigns frequently seek hundreds of thousands of dollars, which is why they are commonly utilized to help companies acquire smaller businesses or finance a merger agreement. This form of crowdfunding is comparable to obtaining a loan. Investors usually need a contractual agreement to repay the amount they offer you within a particular time frame in exchange for their money.

While no interest may be charged on the funds, you should be aware that a tiny interest rate may be charged, which you should be aware of before considering debt-based crowdfunding. Compared to a traditional loan, crowdfunding is more advantageous because the interest rates are substantially lower. Using internet platforms to enable the transaction also reduces the time it takes for a loan to be approved. You will most likely not be forced to repay the funds until your business generates revenue. A debt-based crowdfunding campaign lasts about 4-5 weeks on average.

5. Royalty based crowdfunding

Royalty-based crowdfunding is one of the various types of crowdfunding in which funders receive a lower percentage of the revenue generated once the venture or project has reached a certain level of success. For example, a company working on a smartphone app may require some funds to complete development. Following the launch of the app, any campaign backers will receive a share of the app’s revenue.

The significant distinction between shareholders and royalty-based crowdfunding participants is that backers only receive royalties depending on sales generated by the product or idea they invested in.

6. Real estate crowdfunding

Real estate crowdfunding is one among various types of crowdfunding of the more recent forms of crowdfunding models that are gaining popularity among investors who want to participate in real estate without the bother of obtaining a typical loan or the obligation of owning the entire property.

To pay for a large property, such as an apartment building, a person or a real estate firm may typically collect funds from investors. Investors can contribute significantly lower sums of money (typically starting at $5,000) to real estate crowdfunding, depending on how much of the property they want to buy. Investors will be paid every quarter depending on how much money the property generates.

Conclusion

So that’s all there is to know about the definition and types of crowdfunding.

Finding a crowdfunding website or platform that caters exclusively to businesses like yours is the first step toward getting started with crowdfunding for your business. For instance, Kickstarter is the most popular crowdfunding platform for businesses; over 600 others to choose from throughout the world. Each forum has its own set of benefits that you should know before using it.

However, numerous examples of cybercrime are occurring in this era of the Information Technology revolution. For instance, iFundWomen is a crowdfunding platform dedicated to female-led businesses. They also put a portion of the fees they receive back into their company.

 As a result, investors must exercise extreme caution while participating in donation-based finance. Crowdfunding based on donations has also been accused of funding quackery, particularly expensive and dubious cancer treatments.

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Posted by Elena Hudgens
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Elena Hudgens is an entrepreneur with 10+ years of experience. She started her journey by building her own e-commerce website on Shopify and turned her $1000 savings to millions in just 2 years. Soon she started different ventures in which she failed and succeeded. And now, she's on a mission to help other entrepreneurs with her life and business lessons.
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