Crowdfunding – The Alternative Finance Revolution

Crowdfunding is a modern financial resource for new businesses today that lack the right assets to apply for a loan through any of the traditional methods. Crowdfunding is popularly known as tribe building, where a new business shares their idea and prototype with a myriad of investors who are available to provide support to good ideas.

Crowdfunding is a revolutionary step in financial history that has given a new meaning to funding. It has changed the way a small business can approach funding by creating a platform where good ideas can meet good investors. The start-ups, individuals, and big companies can raise funds for their projects without having to approach a bank. The process of crowdfunding is pretty easy. When an individual or a business has an idea that can change society, it is presented as it is to society through a platform. The crowdfunding community of investors then decide where they want to invest based on rewards or returns.

Models of crowdfunding

Due to the growing popularity of crowdfunding, many individuals and businesses have switched from applying at banks to choosing online crowdfunding platforms. Crowdfunding does not work like traditional funding methods and does not offer any financial returns to the investors. Instead, it has its own models for rewarding the investors.

Reward – When the investors pledge for a project and fund it, the borrower promises a list of rewards to every investor. This is a commonly used model in platforms like Kickstarter and Indiegogo. The investors do not receive any returns or equity in the business they invest in. Instead, they receive a new product from the company at a discount or with an intrinsic value.

Donation – This model is generally used by NGOs and community groups that are working for a cause. The participants who invest in such programs are simply volunteers who do not expect any returns or rewards. Justgiving is an example of such a platform that hosts projects of individuals and groups that need donations to work for their cause.

Debt/loan – Crowdfunding also includes the traditional loan methods where the investors receive a fixed interest payment for a period until the loan is repaid in full. This model is generally used by well-established businesses who want to try out a new venture in the market and need to generate quick funds for it. A business should have the right security to take up an equivalent loan, which is regulated by the crowdfunding platforms like Funding Circle.

Equity – Another common funding method involves equity given to the investor on making a deposit in the business. The investors receive shares of the company upon investing and is a regulated activity.  Since most of the business that needs funds are new, having equity is riskier than the debt model. However, there are several tax advantages for investors to choose the equity model and can receive long term profits if the business takes off.