What is Crowdfunding and How Does it Work?

What is Crowdfunding and How Does it Work?

Do you want more capital to start or run your business?

No prizes to guess the obvious answer. Well, of course, you do. In fact, who would ever say that they have sufficient capital?

The crux is that in today’s cut-throat scenario every second enterprise requires financial support or investors just to keep floating. So, let’s flip this question to make it little correct, “How can you get more capital to turn your business”?

Close analysis reveals that nowadays plenty of ways are available to get capital to run or start a business. Few top familiar ones are like institutional loans, angel investors, venture capitals and partnerships.

However, bitter truth is that raising capital through any of these conventional methods has its own share of disadvantages. Gaining capital through these methods is often time-killing exercise involving truckload of paper and legal formalities.

But that’s not all!

Another disadvantage with conventional methods is that these involve the risk of losing trade secrets or ideas to loan providers.

So, the million-dollar question here is then what’s the solution?

Thankfully, today there is an alternative way!

We are up with one such great solution that is not only reliable but is also swift than any method.

This new method is none other than Crowdfunding.

For lesser aware people here’s a brief about a Crowd funding platform. However, to gain deeper insights about crowdsource funding you can also get in touch with experts of Webcom Systems.

What is Crowdfunding?

Read More: What is Crowdfunding?

Crowdfunding for business is a digital capital raising method in which small funds from a large number of investors are collected. It is also known as crowdsourcing or crowd sharing. Investors make the investment in the name of a specific concept in which they collectively believe. In this way, a financial pool is generated to spark that concept and turn it into a great business venture.

In short, crowdsourcing is a joint endeavour in which investors invest micro-finance to support a business idea they believe in. This collective effort is also known as ‘peer-to-peer fundraising’, ‘social media fundraising’ or ‘online fundraising’.

How crowdfunding differs from conventional fundraising methods?

Well, the market is full of both investors and fund seekers. But the problem is that there is a huge gap or rift restricting the unification process to enter into a symbiotic relationship. By and large, in traditional methods fund seekers go to investors and present their idea to convince them. So, any such method gives limited approach as one needs to show and convince investors individually.

All in all, time-killing exercise. Right!

Contrary to this crowdfunding offers a single platform or network where investors and fund seekers can interact freely. Basically, it acts as a bridge to streamline a fundraising process. It gives fund seekers great reach, exposure as well as saves their time by trimming futile exercise. However, depending on the structure and benefits crowdfunding is further divided into different types.

Types of Crowdfunding options

  • Donation crowdfunding:

This model is basically meant to collect funds for running charitable organizations, NGO’s or other social works. Donors donate small amounts without expecting any reward or return from their contribution.

  • Reward crowdfunding:

In this model, donors invest money in a specific project and get rewards in the form of products or services. In short, the benefits given to donors in this model are non-financial in nature.

  • Equity crowdfunding:

Unlike the above models here investors contribute funds in return of shares or stake in a project. So, by donating funds an investor becomes a part of that specific company as per the donation made.

  • Debt crowdfunding:

Contrary to the above models in debt-based model investors provide loan to fund seekers expecting interest in their invested amount. So, unlike traditional loaning system here fund seekers get a loan from multiple donors. Further, as the rate of interest is more than a banking system, therefore, investors prefer to fund through using this model.

Now, let’s comprehend how does crowdfunding works?

How does crowdfunding works?

If you wish to contribute to a project or fuel a start-up, first register with a crowdfunding platform. After registration, you will be in a position to see the framework of different concepts pitched on the network. You can even contact the concept presenter in case you are interested and need further insights to get started.

You can straightaway ask important questions like

  1. How much fund is required to fuel the concept?
  2. How much fund is collected to date and how many investors have come so far?
  3. How the money collected is going to be used?
  4. What benefits or rewards as an investor you will get?

However, in the meantime, it is also important to understand all investments made through crowdfunding are subject to risks. Sometimes an idea seems great on paper but falls flat when it is implemented practically. So, returns are not guaranteed and there are always 100% chances that an investor could lose invested money.

Even in case, an investor has procured shares of a specific project still the investment is not absolutely safe. Because further selling of such shares is a hard nut to crack. Moreover, sometimes a crowdfunding platform itself may go out of business.

The crux here is that invest only what you can afford to lose and always check the authenticity of a platform.

Concluding Thoughts

With each day competition is becoming tougher and tougher and so will the fund collection. Key to get success in today’s world is to stop thinking about funds collection in the traditional sense. One needs to shift strategy.

Your concept will click or not that time is going to decide. But one thing is sure gathering fund with the crowdfunding method will immediately get you the results you want. Bottom-line is that crowdfund sourcing is the future of fund collection.

But in the meantime, it is also true that the crowdfunding industry has also become competitive.  Therefore you have left with no choice but to think out of the box to be a magnet for investors. Last but not least, always go with best crowdsourcing sites only.

For further queries to start crowdfunding or develop a crowdfunding platform drop an e-mail or call Webcom Systems now!

Tell us in comments below what’s your crowdfunding plan now?