A critical look at the basics of crowdfunding

A critical look at the basics of crowdfunding


For the past few years, crowdfunding has grown rapidly. Here is a look at its basics which will help you understand the in and out of this industry.

What is crowd funding?

Crowd funding is generally a way in which savers or investors are married up with start- ups and small businesses which require a key capital injection to boost their growth or get off an idea from the ground. Even though the sector is quite relatively new, it has however enjoyed a rapid growth largely due to the low interest rates associated and internet advancement.

Why the increased interest in crowdfunding?

The recent financial downturn has made traditional lenders very strict in their lending criteria. This has led to many start-ups and small firms to turn to equity crowdfunding sites to get solutions for their financial needs. The thing about crowdfunding is that it eliminates the need of middlemen between the borrowers and lenders and this removes extra overheads and charges associated with bank borrowings. Savers also benefit greatly from the favorable rates offered compared to high street banks.

The working of crowdfunding

Typically, those looking for funds will use a crowdfunding site to post their project. Then, they use social media platforms together with traditional networks of family, work acquaintances and friends to raise the much needed capital. Crowdfunding comes in three different types which comprise of donation, debt and equity and according to UK Crowdfunding Association; these types are explained here below:

Debt crowdfunding

This is otherwise referred to as peer 2 peer lending where investors are given back their money with interest. While the returns are indeed financial, investors benefit more by knowing that they have made an idea succeed.

Equity crowdfunding

This is where individuals invest in a small business or start up venture and receive equity in exchange. Actually, the money will be exchanged for a small stake or shares in the project, venture or business. Just like other share investments, your stake will go up when the business succeeds and goes down when the business isn’t performing properly.

Reward/ donation crowdfunding

This is where investors simply donate money for a certain project for their strong believe in the underlying cause. The rewards are often referred to as reward crowdfunding and include album cover acknowledgements, regular news updates, event tickets and free gifts among others. The returns given are intangible and investors have a personal or social motivation that makes them to put their money without expecting to get anything back. As such, they simply feel good helping the project.

Business types to invest in via crowdfunding websites

All types of businesses are now turning to crowdfunding platforms as a source of funds including HR software providers, climbing centers and fruit crumble manufacturers- typically all businesses.

What are crowdfunding returns like?

Actually, crowdfunding is still a new born and little data exists on the actual return rates. However, angel investing that is largely comparable has an annual return rate of 22 percent.

How long do crowdfunding campaigns last?

Generally, these campaigns run for several weeks but ventures or projects can raise more capital quickly than they expected originally.