This is a method of collecting money to implement crowdfunding and maintain scientific, creative, social, environmental, and other ideas. That is, those who want to invest money or attract sponsors, which can then benefit from the project financed. But it is also done bolster when people voluntarily give money to support the startup they like or charity.
By the way, we recommend previous resources where you can see the best crowdfunding sites.
First, let’s address a little history. The term “crowdfunding” was created in 2006 by Jeff Howe’s journalist. In English, it is translated as “public financing”. This term began operating recently, but the fundraising method itself was in the last century.
At present, it is most often thorough through the internet, namely funds collected through a special online platform. The first example of such an operation in history was considered a “sponsor” of Band Band Marillion in 1997. American fans held campaigns throughout the country and raised more than 60 thousand dollars.
Where crowdfunding is used and How it works
Funds are raised for truly different purposes. You can help with artistic, education, al or technical projects. For example, open language school, create board games, find unique window washing products, and more.
This is mostly done on a special Internet platform, but money is also appointed through the media or even through social networks. TV news shows talk about children who need care or people who are in difficult situations and experience financial difficulties. They usually request text messages with the number of donations. Funds are transferred to the foundation, which distributes themselves. In this case, we talk about free contributions and fundraising. This term means collecting money for social and charitable needs.
People can also use crowdfunding for personal needs. For example, a student cannot afford to study; Someone doesn’t have enough money to travel or buy a car. Social networks, groups, or personal pages sometimes advertise to help support creativity. The page owner shows the card details where the funds can be transferred or the link to the crowdfunding site.
How crowdfunding works and how businesses can use it
Crowdfunding functions as follows:
- The company produces business ideas. The project must sponsor sponsors.
- The team that works on the idea of choosing a suitable funding platform. Some platforms are for commercial projects, others are more suitable for charity.
- The team raised plans for the campaign. Taxes and other mandatory payments are taken into account when calculating costs. The amount needed to launch the project is derived.
- The company or entrepreneur opens a collection on a funding platform. It is also possible to place an Ad on a social network.
- The team leading the project chooses a way to reward investors.
- The firm brings the idea to life.
- If the project is successful, The firm pays taxes; If the funds were raised on a particular platform, Its Administrators receive a commission from the Company.
Types of Crowdfunding
- Funding, followed by a reward. The author of the project promises sponsors some kind of gift. This reward can be absolutely different: in the form of a service, a monetary gift, or even a virtual bonus. For example, for helping to open a language school investors can attend 10 free classes. Or if you supported the creators of a mobile strategy game at the very beginning, the developers will give you bonuses and offer special features.
- Equity investments. When a firm tries to raise money by selling shares in a project.
- Debt Crowdfunding. A type of financing in which the sponsor earns a profit with interest.
Benefits of starting a crowdfunding site
When it comes to investing in a business or startup, one of the advantages of crowdfunding is that by putting their money into a project, investors can make a profit if the project becomes successful. The following is an overview of how crowdfunding works.
When you invest through a crowdfunding platform in a business, you buy stock in the project. If the business thrives, its stock may rise in value. That way, you can potentially multiply your investment if the business project is successful.
Here’s an example. You decide to invest in a startup with one share worth £10. By taking 10 shares, you give away £100. With favorable development, the company can succeed. For example, after some time the value of the shares increased by 10 times because of the success of the project. In this case, 10 shares are no longer worth £100, but £1,000. In other words, funding a project through funding can multiply the money invested.
Types of crowdfunding
It can be divided into 2 categories:
- Donation-based investing, where participants produce funding for a new project. The main purpose of donation-based crowdfunding registration is to implement a project, product, product, or service at the expense of investors. A typical example would be a charitable project.
- Investment crowdfunding – In this form of investment, companies sell their shares to investors. In this way, they become shareholders and can make a profit if the business is successful.
Types of crowdfunding are as follows:
1. Equity crowdfunding
Used by companies when they raise money by selling a stake in their project.
2. Debt-based Crowdfunding
This type of project financing is characterized by the fact that investors who have invested their money in the project receive their money with interest over a certain period of time. This structure resembles peer-to-peer lending. This type is also called “debt crowdfunding.”
3. Reward-based crowdfunding
Participants in such a crowdfunding platform can receive valuable prizes or gifts for their monetary contributions.
It is worth remembering that before opening a fund platform, it is necessary to register a legal entity, as well as to obtain the appropriate permission to conduct such activities.
Crowdfunding is a promising way to both find the money for a specific purpose and successfully invest it in a potentially successful project. This financing scheme will be a great solution for a startup, innovative developments, testing the feasibility of an idea, a non-profit project. Perhaps in a few years funding will be able to offer a full-fledged alternative to bank loans for business development.