What is Crowdfunding? How Does it Work for a Business?

Crowdfunding is a way for businesses, people and charities to raise money. There are organizations and individuals that invest or donate to these projects in return of a reward. So, it may not be crazy to consider crowdfunding for your trade finance business.

Crowdfunding Business

How Does Crowdfunding Work?

Let’s suppose you have a business idea but no funds. You can raise money through crowdfunding. For that, you must pitch your idea to a crowdfunding website. Good news is you won’t have to visit a bank to get a business loan. The “crowd” that will fund includes people and (or) organizations.

Today crowdfunding brings so many new concepts to the world. Even if the venture is not that technical, the platforms of today are very tech savvy. They are designed in such a way to automate the process of fundraising. You can browse endless campaigns from your phone and invest by the tap of the finger. 

Crowdfunding has been around for centuries. But thanks to the modern world, it has enabled entrepreneurs to reach capital partners easier than ever. Same goes for investors as they have an array of options to invest in.

Types of Crowdfunds

There are 3 types of crowdfunds i.e.

  1. Donated based crowdfunding: Kickstarter and Indiegogo are the platforms that accept donations. When they were initially launched, it was legally unacceptable for entrepreneurs to offer their shares but this restriction has been removed now.

The money generated through donations is used for financing ventures and creating new products. The contributors get something tangible in return like being the first one to receive the product.

  1. Debt crowdfunding: Peer-to-peer lending portals are a common example of debt funding. Private lenders pool their funds and lend to people for a variety of needs. Since it’s a debt, you have to repay it in monthly installments. The interest rate on such lending is usually high.
  2. Equity crowdfunding: As the same suggests, you will have to trade the stocks of your business to generate capital. You are inviting people to invest in your business.

How Can Crowdfunding Help Your Business?

Apart from gaining money, there are many reasons for a business to crowdfund. If you are a brand new venture, crowdfunding will give you social proof and your concept the attention it deserves.

Not many businesses realize that crowdfunding campaigns are a useful PR tool. They will help you gain the visibility and buzz you are looking for.

Another underestimated benefit of crowdfunding is that it secures early users, both its advocates, and/or ambassadors. These individuals might have a real financial interest in your business. This could empower your success.

How Does Crowdfunding Work?

If you have developed an interest in crowdfunding, the next question in your head must be how does it work? You will have to find a crowdfunding website to reach out to potential investors. Fortunately, these sites are in abundance.  

For example, LendingClub allows its members to directly invest in and borrow from others. There is no bank involved in this transaction. Keep in mind sites like these connect business owners with investors. They lend money in exchange for a guaranteed percentage of revenue from your business.

Such sites also allow you to sell your company shares. They operate like a mini-IPO but there are no traditional hurdles. You might want to check the legal regulations in your country if you are planning to sell stocks to the general public via crowdfunding sites.

How to Make the Most of Crowdfunding?

The thing is, there are thousands of people out there who are trying to gather capital for their business. Getting noticed among so many ideas is challenging. These tips might help:

  • Carry out thorough research before pitching your idea. Make sure you use plain English when addressing potential investors. Anticipate as many questions and prepare your pitch accordingly.
  • People prefer teams or personality. So try to be as engaging as possible. People need to see that you have a passion for what you do.
  • Crowdfunding is an interactive process. You must give proper time and attention to your investors. They will have lots of questions for which they need compelling responses. You will have to be involved with them on a daily basis. This will help build trust.
  • A problem with crowdfunding is that potential investors are less likely to give you money if your funding arrow is at zero. You will have to bring your friends and family on board. If your friends or family aren’t supporting your idea, maybe you need to reconsider everything.
  • People will ask you questions and you must answer them transparently. Don’t try to fool your investors with false promises.
  • Every potential investor will thoroughly examine your idea. So, consider this to be a positive and mandatory part of the process.

Is There Any Risk in Crowdfunding?

There is a certain level of risk for both investors and the business. For an investor, the biggest worry is the failure for the business to launch or succeed in the next 5 years. If that happens, it kind of means they have lost all the money. Other than this, the shares might not raise in value.

When it comes to business owners, the worst scenario is people may not like your idea and hence they won’t invest, to begin with.

Final Words

On the whole, crowdfunding can be very profitable for a business. It’s not as risky as investing in CFD Stocks so relax. The only risk is your venture failing. Make sure you do thorough research, know the cost involved and select the best channels.

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Article Author Details

Harry Miller