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.
Peer-to-Peer Lending
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.
Equity 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.
Reward-based Crowdfunding
In reward-based crowdfunding, contributors get a reward such as the product for which the funds were collected once the product is developed.
In this type of crowdfunding, only the promised reward has to be given to investors, no monetary benefit. For companies seeking funds in this manner, it is a sort of pre-sales booking. Innovative product offerings are the best fit for this type of funding. Rewards must be given to investors on time or the reasons for delay must be relayed.
Donation-based Crowdfunding
A charitable cause such as helping a child raise funds for an expensive drug is an example of donation based crowdfunding. There is no material or monetary reward for this type of crowdfunding. The reward is the altruistic act of giving and enabling someone to get back on track or tide over a crisis.
