Sometimes people might not have enough money to start a venture or implement their dreams into action. Getting a bank loan is also difficult these days and not to mention the personal loans. These loans require a lot of formal procedures and the interest rate is also high. In order to facilitate these budding entrepreneurs with money and earn money at the same time, the concept of crowdfunding was introduced.

What is Crowdfunding?

Crowdfunding is defined as the concept of obtaining money in small amounts from a wide range of people. Think of this as raising money from your friends and family in small amount. The concept of crowdfunding has helped many budding entrepreneurs and artists to achieve their dreams.

For example during early 1997, the British rock band “Marillion” raised nearly $60,000 from their fans to complete their tour and for funding their studio albums. Similarly, many other projects like smartwatches to solar sailing spacecraft raised funds through crowdfunding.

 

Types of funding

Crowdfunding can be done in many ways. One common technique useful for startups is Reward-based Crowdfunding. 

 

Reward-based Crowdfunding

In this method, the investors/backers who are mostly friends and family will contribute money for the project and in return, they will receive some non-financial benefits like tickets to the concert, credits, etc….

 

Debt Crowdfunding

In this method, you will receive the funding from the investors and they, in turn, will receive some financial return like interest on the amount. “Money, if lent by a bank is called loaning; if lent by multiple investors in small amounts through the internet is called debt-based crowdfunding” .The major disadvantage of this method is that, unlike reward-based crowdfunding, you will have to repay the amount back to the investors along with the interest.

 

Equity Crowdfunding

In this method, the investors will receive the returns in the form of shares or by providing them with a small stake in the company. These funds are mainly for companies who are looking forward to creating a permanently growing company for a long period of time.

 

Donation Crowdfunding

The investors do not receive any returns and hence it's more or less like a donation. The money is provided to the clients as a form of donation or charity. This technique can be used for raising money for social causes and also for certain personal or medical issues.

 

Why is reward-based crowdfunding is most suited for startups?

 This crowdfunding method is the best way to raise funds for a startup because it is easy, does not require any documentation and is way cheaper than any other private loans or bank loans.  Crowdfunding also acts as a form of advertisement and people who invest in this technique are automatically attracted towards the outcome of the product inducing them to try it automatically. This is a form of promotion technique.

 

Hence Crowdfunding is the most suitable technique for raising money for startup in an easier way. There are a number of websites that offer Crowdfunding but proper precautions should be taken before investing because of the availability of fraudsters. But ignoring that crowdfunding is the best way to fund innovation and innovators.