Start Point Finance

The 3 Types of Crowdfunding

by | Apr 19, 2018 | Finance Tips | 0 comments

Crowdfunding is a means of raising funds for a project or venture from a large group of investors who each chip in a small amount to reach a larger collective sum. Although there are variations in each, the three main forms of crowdfunding which we will explain in more detail are:

Reward, Equity, Loan.

    Reward – This is where investors pledge a certain amount of money and expect a reward in return. The levels of investment are typically tiered with different levels of reward depending on the amount pledged. This form of funding is often used for community or creative projects, however it shouldn’t be underestimated as a source of business capital, particularly for start-ups. Pledges can be treated as pre-orders for your product or service and your investors will help spread the word. Pushing your crowdfunding campaign is an early marketing lesson for your business, gaining supporters who have an emotional connection to your brand.

    Equity – Used by new/ established businesses to raise funds in return for an equity stake in the business. It’s almost like going on Dragon’s Den, but instead of having 1 or 2 investors it will be 1 or 2 hundred. This is particularly useful for technology business with a future revenue who need immediate funds to realise it, and investors who are looking for a long term return. Like reward based crowdfunding, your investors become supporters of your business so not only does this raise capital, it is a useful marketing activity. The downside is you have to give away a chunk of your business.

    Loan – If you wish to raise funds for a specific project you can crowdfund a loan without having to give up any equity. Security could be taken in the form of property or invoices, but typically loans are unsecured. The lending platform reviews your application, and if suitable present it to their members who buy shares in the loan. You can use a consultant (such as Start Point Finance) to help secure you a lower interest rate. We process crowdfunding applications at no extra cost because the platforms split their fee with us.

     

    Whichever form of crowdfunding you use, make sure you share your campaign as much as possible with potential customers; once they have invested their hard-earned cash in your business they will become active supporters.

    Do you have any experience (good or bad) with crowdfunding? If so, share it with us below…