Over many years of capitalism that the world has endured, many different methods to acquire business loans or funding have been found by the people and businesses. Most of them would go to the traditional lender like private investors or banks.
With the enhancement of the technologies, the world is changing. There is no wonder in the fact that the Fintech industry is now putting a step forward to this innovation. And one of the best parts of the Fintech industry is Crowdfunding. Although it has proven to be effective in the past, the 21st century has come up with a new era for funding sources.
We know that until recently, financing a business or project involved asking a few people around for a big sum of money. But now crowdfunding is turning this thought on its head, via the internet to help the entrepreneurs to thousands – if not millions of the probable funders that each contribute a small amount.
Crowdfunding has swiftly driven the popularity over the last decade and so on. As such to make your idea more clear on it, we shall discuss ‘How does Crowdfunding Work?’
But before going there, firstly let’s discuss ‘What is Crowdfunding?’
What is Crowdfunding?
Answering this question, crowdfunding is when an organization, business or individuals fund a venture or a project with donations from many people. Basically, the term can be explained by splitting it into two parts; “Crowd” that “funds” a venture or project, in contrast to one or two major investors.
In another way, crowdfunding combines some of the best crowdsourcing and microfinancing, by bringing together various individuals who are ready to contribute money to the companies and projects as per their niches. It is said as a young and quickly growing market that is transforming the way people look at their money. And with that, crowdfunding even changes the way businesses raise the capital. This practice is often used by entrepreneurs, filmmakers, charities, inventors and artists.
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Just by receiving a necessary boost to the cash flow, the businesses can launch the new projects or can get off the ground. Most of these campaigns occur via the internet on the online platforms that have the set timeframes for when the money will be raised and even discloses some specific pecuniary goals.
As per the analysis of the Massolution’s Global Crowdfunding Report, by 2025 crowdfunding is expected to become a $300 billion industry. And then same consulting firms expect this industry to expand at a compound annual rate by 100 percent in the near future.
This explains ‘What is Crowdfunding?’ and even shows its importance for funding a project or venture. After getting a brief idea on it, now let us throw some light upon ‘How does Crowdfunding Work?’
How does Crowdfunding Work?
The four main parts of crowdfunding are donation, reward, equity, and lending.
Every crowdfunding platform incorporates two main entities, one is the project owner (the one with a new project idea) and the second is the project backer (the one willing to fund the project). Here anyone with a sterling idea can share their project details compiling the terms and conditions on the available crowdfunding platforms. And those who are interested in any given idea can give funds. Here the thing to be noted is that funding amount and the duration of the project can be solely decided by the project owner alone.
Here the crowdfunding can be done in three main ways,
Equity-Based Crowdfunding involves a traditional trait where the investors typically pay a huge amount of money, therefore are given an equity position in the campaigner’s business. Although in lending, the original amount will be repaid along with the appropriate amount of the interest. Some of the equity-based crowdfunding platforms are Crowdfunder, CircleUp, and OurCrowd.
Donation-Based Crowdfunding is the process where the investors of the business or a project will receive some reward that usually in the form of a service or product. This is the perfect fit for the charitable causes and community based where we can say that the reward model is the variation on the donation-based funding. Few donation-based crowdfunding sites are GoFundMe and JustGiving.
Given the advances in modern technology, with crowdfunding now investors can browse the different investments online, transfer funds, have access to watch how the investment is being spent and can even sign legal documents online with full security.
How does Crowdfunding Work for Real Estate?
At its core, crowdfunding means pooling money together to make an investment from a group of investors. And in this sense, we can say that crowdfunding has existed for centuries in the real estate.
This new way of crowdfunding for real estate you can make an investment in two ways,
- Equity investments (such as owning shares in some apartment buildings) which in turn will allow investors for sharing the cash flow from the appreciation and rents when the property will be sold.
- Loans that being secured by the real estate (just like a bank making a loan), here these loans will pay the monthly interest and therefore investors will be secured by the property.
This shows ‘how does crowdfunding work for real estate’. Now another question is how does crowdfunding work for charities?
How does Crowdfunding Work for Charities?
As we know, crowdfunding platforms give an opportunity to the charities for raising the money via the internet. By campaigns, it means a project being brought on the crowdfunding website which has every detail that what charity is fundraising for and why? And then charity shares it as much as possible with the help of the online crowdfunding platforms which in turn will encourage the supporters for making the financial pledges for the given cause.
By providing the needs charities can make their idea very clear on the fundraising platforms and hence the funds are being raised.
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Crowdfunding is a great way for the charities for broadening their network online, raising awareness, reaching out the new supporters, etc. It’s more than the money and we know that crowdfunding platform doesn’t cost much. As they take a smaller percentage of the total amount being raised just to cover the admiration cost. Now that you know how does crowdfunding work in every possible field, let us move ahead.
How do Crowdfunding Platforms Make Money?
So here comes the most important thing that is, how does crowdfunding platforms make money? How they earn money through these crowdfunding platforms?
To make your thought clear on it, platform fees are the main way through which most of the crowdfunding platforms make money. Talking further, there are two ways in which the fees have been collected,
All or nothing campaigns, here you must hit the goal you set in order to have the funds that have been raised. And typically the crowdfunding platform will take 5% of the funds raised if you hit the goal.
Keep what you raise campaigns, where you are enabled to keep the funds that have been raised, even in the case you haven’t hit the goal by the end of your fundraising duration. Here the platforms take 8-10% of the total fees if your goal is not being fulfilled.
With that, you even need to pay the processing fees with almost every crowdfunding platforms. The average fee these platforms take is 3%, though it may vary from platform to platform. This is how crowdfunding platforms make money.
Popular Crowdfunding Websites
Crowdfunding has now become the go-to method for the hot new projects and ventures to launch their ideas funded. Listing out some of the popular crowdfunding websites you must look for,
Kickstarter is perhaps the well-known and best of all the crowdfunding websites. Here those who looking for funding set a goal and then they can set the amount of time the money should be raised before the deadline of the project. The best thing about the Kickstarter process is all-or-nothing. Here the fund giver’s credit card will not be charged until the project meets the goal.
Indiegogo, it works similar to the Kickstarter, but the thing is what makes it different? Here you are not limited to an all-or-nothing strategy, as it allows you for the “flexible” funding. As the sites believe that it works better for the projects as here any little bit helps. What’s next for the funders is the partnerships of Indiegogo with different retailers.
For all those who looking to fund the things that fall outside the gadget thing, GoFundMe has now become a popular alternative. It is the one that let you raise them for a social change and even advocacy. A lot of people have used this site to raise the money for the peoples who have lost their property and loved ones due to some tragedies.
Want to Start your Own Crowdfunding Platform?
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Share your thought with us!
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