Types of Crowdfunding
There are several types of crowdfunding campaigns. Sponsors decide on the type of campaign model they want to use based on their needs.
In peer-to-peer lending, several people act as lenders to give money to the borrower, with the expectation that an interest payment along with the principal amount will be paid back to them. Borrowers will accept funds from those who offer low interest rates after a bidding process by these crowd lenders. The loans themselves are small amounts.
Peer to peer lending is suitable for capital restructuring, refinancing, acquisitions, new product launches and expanding to new territories. Companies who are profitable and growing, with stable business can look at peer to peer lending as an option. Pre-profit companies are not good candidates for this form of crowdfunding.
As the name suggests, in equity crowdfunding, investors get a stake in the equity of the firm for advancing funds. Companies seeking funds have to set the terms of the funding, including the price at which to sell and at what level of funding equity will be available. It is mandatory to share disclosure and legal documents, AGM minutes and decisions. The online crowdfunding platform may conduct due diligence.
They also need to communicate if equity holders will have voting rights, degree of control, and the possibility of legal damages if there is a breach of contract. Investors will expect forecasted sales and profit before they invest. This type of funding is suitable for all companies, except those that are in the pre-profit and pre-trading phase.
In reward-based crowdfunding, contributors get a reward such as the product for which the funds were collected once the product is developed.
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