Types of Crowdfunding
The two most common meanings of the term refer to crowdfunding conducted by startup companies seeking to launch a product or service, as well as by individuals experiencing an emergency. Many people afflicted by a natural disaster, a large medical bill, or another catastrophic incident such as a house fire have gotten financial assistance that they would not have received otherwise, owing to crowdfunding services. However, in recent years, certain crowdfunding sites, such as Patreon and Substack, have broadened the scope of crowdsourcing to provide a means for creative persons, such as painters, writers, singers, and podcasters, to continue their creative activity by obtaining a consistent stream of revenue. There are four major types of crowdfunding: contribution, reward, equity, and debt crowdfunding.
1. Donation Crowdfunding: Donation crowdfunding is a campaign in which investors or donors do not receive a financial return. Individuals donate to support a specific idea or cause. Donation-based crowdfunding campaigns frequently raise funds for charities, organizations, and disaster relief operations. For example, a company may make philanthropic business donations to assist raise funds.
2. Reward Crowdfunding: Reward crowdfunding is when people contribute to a business in exchange for a reward or incentive. Typically, the incentive is something related to the product or service your company provides. Reward-based crowdfunding works most effectively for businesses that sell items and other tangible assets. It can also help startups find a test market for their product or service.
3. Equity Crowdfunding: Equity crowdfunding allows individuals to make real investments in private firms. Contributors might become part owners of your company by exchanging capital for equity shares. Basically, equity crowdfunding allows you to sell a portion of your company’s ownership to contributors. Your contributors receive a financial return on investment and a portion of earnings in the form of a distribution or dividend. Equity-based crowdfunding campaigns are popular among entrepreneurs and businesses seeking an alternative to venture capital investments.
4. Debt Crowdfunding: In debt-based crowdfunding, the campaign creator borrows money from contributors. People agree to lend money to a corporation. In exchange, firms promise to repay loans. Typically, business owners establish time limits for how long it will take to repay contributions, including interest rates. Entrepreneurs who do not want to give up stock in their business may seek assistance from debt crowdfunding instead.