Crowdfunding Loans

What are Crowdfunding Loans?

Crowdfunding loans are a cooperate system of financial support where a vast pool of people contribute resources together to fund a project, business, or idea. Crowdfunding loans offer an alternative way for people to raise finance to gather the money required for the attainment of their goals. Individuals and organizations who donate towards this scheme do so in return for a potential profit or reward. Crowdfunding loans are usually collected through the internet. Legislation heavily guides crowdfunding. However, the law (or lack thereof) vary among different countries.

Crowdfunding efforts have increased in recent years, as people continue to find it beneficial to raise funds for various reasons. The system is gradually branching out into even personal causes. Individuals who wish to raise money through this channel can do so by posting information about the project on a crowdfunding website. As such, they need not go to a bank for this.

Things You Should Know Before You Create a Crowdfunding Loan Campaign

As with every financial subject, it is important to know how to go about your crowdfunding push if you are to achieve success. Here are some of the things you should consider:

  • Set attainable financial goals. One of the primers for success in crowdfunding loans is setting a realistic goal. Your potential contributors need to be convinced that you can be able to reach your financial target. Setting unrealistic goals would put them off.
  • Communicate your thoughts easily and efficiently. Make it a point to express your cause in a simple and straightforward tone, to avoid confusing your potential contributors. Also, remember to keep your sentences short and convincing.
  • Always keep people updated. Inform everyone about your campaign. Regularly update your campaign so that people can keep visiting your site.

Types of Crowdfunding

There are four different types of crowdfunding in all. They include:

  • Rewards-based crowdfunding. Here, contributors provide small amounts of money (usually between $1 and $1,000. Although it can be more than that sometimes) for a reward. Such rewards often include the item(s) being produced.
  • Donation-based crowdfunding. Donation-based crowdfunding is a type of crowdfunding where individuals raise money for a cause or a non-profit. This may include building a school or other social amenities in poorer countries of the world, or toward covering an individual’s medical bill. The amounts collected usually range between $1 – $1,000. Examples of donation-based crowdfunding are Crowdrise and GoFundMe.
  • Debt crowdfunding. With Debt Crowdfunding, it is lenders (or investors) who give money in return for interest on the sum contributed. This works just like a loan from a bank. This type of financing is used to raise funds for reasons such as home improvement, debt consolidation, credit card refinancing, etc.
  • Equity Crowdfunding. Here, lenders provide larger amounts of money (typically $1,000 and above) in exchange for a small piece of share in the company they are investing. Examples of this type of crowdfunding include Crowdfunder, AngelList, among others.

Risks and Challenges Associated with Crowdfunding

While crowdfunding provides inexhaustible possibilities for all involved, it is not without its associated risks. These include:

  • In the case of equity crowdfunding, it is hard to divide authority between the crowd and a company’s management.
  • Lack of transparency. Most times, companies are unwilling to share information about research and development, knowledge, and technology with the crowd.
  • It is possible not to achieve the desired funding. When this happens, it effectively kills off the campaign.
  • Cost of financing campaign can be quite high, due to the marketing, fees, energy, and time that the campaign demands.
  • There are chances that your product may not fit the campaign.