Crowdfunding is known as a form of collective financing through which the entrepreneur receives the necessary investment for his or her project through the investments of many small contributors. Through the evolution of technology and Fintech, online platforms have emerged allowing companies to make crowdfunding much easier to accomplish, since these platforms bridge the gap between investors and startups. There are 5 different business models that can be used by crowdfunding platforms to be familiar with, because not all models provide investors the opportunity to receive a financial return.
1. Investment-Based Crowdfunding
This is a very popular business model throughout all of Europe and parts of the world. The “crowd,” or investors, invest their money into a project or company that they believe will give them a good return. In doing so, the company provides the investor(s) with equity or debt instruments.
Equity crowdfunding is when the company provides the investor with shares or ownership of the company in exchange for their investment. This is the same as “common stock” that in a stock market. Although, under this model, the company does not give up control of the company. Furthermore, the company can also issue debt instruments to the investors such as notes, bonds, certificates, mortgages, leases or other agreements between a lender and a borrower. These debt instruments assure the investor that they will be repaid back in full from the loan given.
2. Lending-Based Crowdfunding
Also known as “crowdlending,” “peer-to-peer,” or “marketplace lending.” Under this model, companies seek funding from individuals in the form of a loan. The company then repays the loan along with interest that is incurred over time. This form of crowdfunding has grown rapidly and become more popular since the loans have lower interest rates compared to banks with more flexibility and options for a strong return.
3. Invoice Trading Crowdfunding
A less popular method that is also another form of “peer-to-peer” lending. In this method, a business seeking funds, goes to an invoice trading platform with their own invoice of desired funds. If approved, the business receives a certain percentage of their desired invoice typically within 48 hours. The invoice is then sold on the online platform for investors to invest in a certain percentage of the invoice. After the invoice request is fulfilled, the business then begins to pay back the invoice along with interest.
This method allows companies to finance their projects within a short period of time (48 hours) and allows investors to diversify their portfolios quite easily. Invoice trading is a very fast, flexible form of crowdfunding which attracts both companies and investors.
4. Reward-Based Crowdfunding
A much simpler model compared to the other methods. In reward-based crowdfunding, investors provide funding with the expectation of a non-financial reward. The reward is usually in the form of a good or a service, given at a later time after the investment. An example of this is an individual donating money to fund a project for a new video game, in return, he or she receives the game after it is created. This model tends to be popular for many small projects that companies are attempting to accomplish.
5. Donation-Based Crowdfunding
Compared to all other business models, this can be considered the simplest method of crowdfunding. This is very common in politics when candidates want to raise money for their campaign. When a politician is running for a position, people can make donations to help fund their campaign. However, this isn’t solely used by politicians, this is also used by charities or any other projects that require funding.