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Over the last few years, alternative sources of funds have become an extremely popular option for both investors and entrepreneurs. The emergence of crowdfunding and similar methods has allowed small and medium enterprises to obtain finance easily with a few clicks.

Small and medium enterprises have started moving towards such modes of finance as they are comparatively less complex than banks. Moreover, the relatively low cost of entry and accessibility of crowdfunding platforms have accelerated this revolution in funding.

In simpler words, crowdfunding is a means of raising funds from large groups. Kickstarter is perhaps the best example of a crowdfunding platform. Let us get deeper in crowdfunding and how it has changed the way of raising funds for small and medium enterprises.

What is crowdfunding and how it works?

Crowdfunding is a practice of raising funds from a large number of individuals to finance a new business venture. It makes use of the easy accessibility of the vast network of people through social media and digital crowdfunding platforms.

Crowdfunding follows quite the opposite approach from the traditional form of financing. In contrast to banks which can take around 60 days to approve the loan, the process of raising funds in crowdfunding is faster and involves fewer stages. Furthermore, there are no credit score requirements associated with crowdfunding campaigns.

It is worth mentioning here that since crowdfunding success depends on enticing people to invest, it preemptively lets businesses tap into their potential market before commencing the business rather after.

Crowdfunding utilizes web-based platforms to solicit funds for business ideas by showcasing the product/service story to potential investors. The platform typically charges a fee from the entrepreneurs to procure money for the idea.

3 Types of Crowdfunding

Reward-based crowdfunding

Probably amongst the most common type of crowdfunding where people promise to invest in return of a reward for the investment. For instance, the entrepreneur offers a sample product to investors against the investment made by the people. In this system, people who receive the reward are technically not investors in the business.

Debt-based crowdfunding

In this model of crowdfunding, borrower requests for loans from lenders in exchange of interest. Also known as ‘crowd-lending,’ debt-based crowdfunding has become the savior for start-ups as these platforms offer loan at competitive and low-interest rates.

Equity-based crowdfunding

As the name suggests, borrowers offer a share in the company to the investor against the amount of their investment. Businesses often use this type of crowdfunding if they are already operating and need to expand. The system works just like share market and is heavily regulated.

Benefits of Crowdfunding

From tapping into a wider pool of investors and potential customers to quick fundraising option, crowdfunding offers a host of advantages to businesses over traditional methods.

Efficiency – Crowdfunding streamlines and centralize fundraising efforts for businesses. It avoids duplicating of efforts leaving more time to run the business instead of fundraising.

Wider reach – Crowdfunding platforms with a huge number of investors allow entrepreneurs to get access to thousands of potential investors.

Validation of idea – Presenting the business idea to the masses even before the commencing stage is a great opportunity for entrepreneurs to refine the product or service. The suggestions and ideas will come from the people who are actually interested in using the product.

Marketing – Crowdfunding campaigns can give a boost to product promotion and marketing. For businesses, it is an easy way of steering huge traffic to their websites, social media platforms, and any other sources.

The future

Crowdfunding has witnessed immense growth in the past five years. Businesses in various industries are eyeing towards such alternative finance models considering the benefits they tend to offer.

Crowdfunding might not replace the traditional modes of funding any time soon. But, it will be amongst the most exciting part of the future lending and investment dynamics.

We believe that crowdfunding has emerged as a crucial force in the global finances sector, one which appears to stay. However, we have only begun to see the ways in which it will transform the financial sector.