How does Crowdfunding Works?

Crowdfunding Works
18 MAR 2019

How does Crowdfunding Works?

Crowdfunding is a way of raising capital from various individuals to finance a business. Instead of raising a large amount of money from one source like banks or private investor, you can raise small amounts from multiple people. For startups and growing businesses, crowdfunding is an innovative way of seeking funds for a business idea and new projects. Crowdfunding has transformed ways in how businesses raise capital by expanding the pool of funding sources.

How does Crowdfunding Work? There are different crowdfunding sites which provide a platform where you can host your campaign. The forum or platform can be used by anyone who has an idea which they want to pitch in front of the people who are willing to invest. If the campaign got successful, then fundraisers have to pay some amount to the platforms.
Before you begin to think about using crowdfunding to raise capital for your business, it is important to have knowledge about the different types of crowdfunding. Let’s zoom in on the four categories of crowdfunding.

  • Reward Crowdfunding: This crowdfunding is used to pledge money for creative projects. The investors invest money and receive a non-financial reward, like event tickets, gifts, etc. Investors are likely to expect greater rewards if they spend more. If an entrepreneur is looking for crowdfunding and at the same time wants to stay out of debt, then this type of crowdfunding will work best for them.
  • Debt Crowdfunding: In debt crowdfunding, the fundraiser or the company is seeking to get loan from the crowd and in return the individuals who are lending the money get the company’s legally binding commitment to pay back the money at set time intervals and interest rates.
  • Equity Crowdfunding: Investors will give a lot of money to the company and get shares in return or some stake in the business or project. Put it this way, the fundraiser sells a piece of its ownership to the individuals contributing money.
  • Donation Crowdfunding: As the name suggests, this crowdfunding is exactly what it sounds like, it is used to collect money for a non-profit cause and the fundraiser is not expected to return back anything to the contributors.

Final Thoughts: If you want your campaign to be successful, then you need to have a clear goal and a strategic plan. Crowdfunding is definitely changing the way entrepreneurs raise the money for business, but it doesn’t mean it will be easy to execute the fundraising campaign.

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