This article is an external press release originally published on the Landlord News website, which has now been migrated to the Just Landlords blog.
Crowdfunding is a method of raising finance by appealing for small amounts of money from a large number of people.
Traditionally, financing a business, project, or venture involved asking just a few people for large amounts of money. Crowdfunding flips this idea, and uses the internet to find thousands of potential funders.
What is Crowdfunding?
Those seeking funds can set up a profile for their project. They can then use social media, and networks of family and friends to raise money. There are three different types of crowdfunding: donation, debt, and equity.
Donation
In this case, people will invest because they believe in the cause. Rewards can be offered, such as acknowledgements, or gifts. Returns are not considered viable.
Donors will have a social or personal incentive for working with the project, and don’t expect anything in return. Websites include: www.banktothefuture.com, www.buzzbnk.org, www.crowdbnk.com, www.crowdfunder.co.uk, www.gambitious.com, www.peoplefund.it, www.pleasefund.us, hubbub.net.
Debt
In this case, investors receive their money back, with interest. This can also be called peer-to-peer lending, and allows for the borrowing of money without traditional banks. Returns are financial, but the investor will have also been involved in the success of an idea they believe in.
Microfinance involves lending small sums of money to the poor, typically in developing countries, and no interest is paid on the loan. Sites include: www.abundancegeneration.com, www.banktothefuture.com, www.buzzbnk.org, www.trillionfund.com.
Equity
Investors fund a project in exchange for equity. Money is exchanged for shares, or a small stake in the business. If the project is successful, the value goes up, if not it will go down. Websites include: www.banktothefuture.com, www.crowdbnk.com, www.crowdcube.com, www.ethex.org.uk, www.gambitious.com, www.microgenius.org.uk, www.crowdmission.com, www.seedrs.com, www.sharein.com.
Pros
- Crowdfunding can raise awareness for new businesses.
- It can be a quick way to raise money, and there are no upfront fees.
- Investors are able to track progress, and may promote the project.
- For businesses that struggle to get bank loans or traditional funding, it is an alternative option.
Cons
- If the business is not protected by a patent or copyright, other users may see it on the website and steal the idea.
- If funding targets are not reached, any finance that has been pledged is usually returned to the investor.
