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Crowdfunding Models

Crowdfunding Models

According to the revenue model, crowdfunding can be divided into four types of models.

• Donation-based crowdfunding

Rewards crowdfunding

Equity crowdfunding

• Lending based crowdfunding

1. Donation-based crowdfunding:

• Donation-based crowdfunding is a method of raising funds that relies on the contributions of a large number of people to be successful.

How it works:

A great idea for a new product or service can be realized through crowdfunding, which can be a viable alternative to traditional methods of raising funds, such as borrowing money from banks or private lenders, or offering equity shares in the company. Crowdfunding based on donations allow entrepreneurs to pre-sell their products to a large number of backers, each of whom makes an individual contribution of a relatively small sum to the project via the internet. While maintaining full ownership of the project or company that is being funded, entrepreneurs may also offer token rewards that increase in value or significance over time in order to encourage participation.

Is it free?

Donation-based crowdfunding platforms usually charge a fee of 5 percent to 10 percent of all donations received.

2. Rewards Crowdfunding:

• For the money pledged to a project, rewards-based crowdfunding provides a product or service in exchange for the money pledged.

• A type of small-business financing known as rewards-based, or seed, crowdfunding is a method in which entrepreneurs solicit financial donations from individuals in exchange for a product or service.

How it works:

On a crowdfunding platform, business owners describe their project or business idea, as well as their fundraising target. Businesses offer incentives in exchange for charitable contributions. 

Contributors who make contributions of $100 or more may receive an original handmade bracelet from a jewelry designer, and contributors who make contributions of $1,000 or more may receive a solar-powered lawn mower from an inventor of solar-powered lawn mowers. Rewards don't have to be expensive; some businesses will simply send a handwritten thank-you note as a token of appreciation.

Is it free?

Platforms typically charge a percentage of funds raised, which can range from as little as 5 percent to as much as 13 percent, plus a processing fee. Additional processing fees may also be charged.

3. Equity Crowdfunding:

Equity crowdfunding is the online offering of private company securities to a group of people for investment purposes, and, as such, it is considered to be a part of the capital markets by some experts.

How it works:

Platforms are usually SEC-registered (SEC). Individual contributions are restricted to prevent "over-enthusiasm" for investments. Companies can only raise up to $50 million in a year, depending on the fundraising tier (all of which are regulated by the SEC). Companies must be US or Canadian.

In his role at Start Engine, Josh Amster oversees sales and marketing. When picking a crowdfunding site, he advises startup entrepreneurs to consider: A platform costs how much? And does it accept credit cards or bitcoin?

In addition to onboarding and marketing services, StartEngine also provides legal and financial counselling. It also includes investor services and compliance teams. A crowdfunding platform provides a readymade solution for businesses to acquire financing, and a way for the public to get in early – even before the IPO.

Is it free?

No, it is not free.

4. Lending based Crowdfunding:

Lending based crowdfunding is also called debt-based crowdfunding.

Defining debt-based crowdfunding, it is a crowdsourcing strategy that is used to generate funds by soliciting loans from a large number of investors (lenders) who anticipate being repaid their loans plus interest over the course of the time period that the loan was "used."

How it works:

Debt crowdfunding works for most established companies and some startups. Create a pitch and submit financials to a crowdfunding or P2P financing site. The APR, minimum investment, investor profile suitability, other information and terms will all be determined by the platform during its due diligence and credit checks.

It will nearly always be required to supply security, such as commercial assets or a personal guarantee, depending on the amount of money raised.

The crowdfunding platform then makes the offer known to investors online via its website, and the loan is made available. The crowdfunding website will keep any funds raised in a separate account until the goal is met.

The terms for both lenders and borrowers vary by platform, but in general, loan repayments begin within a month or two of the company receiving funds. Investors can watch the progress of their various loan investments via an online dashboard on the crowdfunding website.

Is it free?

Companies that offer lending based crowdfunding demand various charges.  

Take a look at some crowdfunding options below by clicking on the Shop Funds button.

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