Crowdfunding may be a foreign term to some people, but it is the main source of funding for the new startups, and businesses. Crowdfunding for small business has gained a foothold as the main method of financing for the startup at the first stage only.  When entrepreneurs enter the business world for the first time, then they often face difficulty in arranging the funds. Lack of help from the friends, families will make the startups turn to the institution and investors for the funds. Chances are pretty high that the bank will refuse to lend a loan to a start-up business, and if they agree huge collateral is asked. When all the doors get closed for the first-time entrepreneur, then the door to the crowdfunding platform is left open to supporting the ideas of the entrepreneur.

There is a huge positive response from the startup’s founder and the small business owners who have picked crowdfunding for adding capital to their business venture. One can say that the trend of crowdfunding for startups is gradually gaining momentum and is showing strong signs of growth in the ecosystem of startups. There are several crowdfunding platforms available in the market, and the entrepreneurs and businesses have first to know how crowdfunding differs from platform to platform. To pick the crowdfunding options, businesses need to see their strategies, requirements, and do the market analysis first. 

What is Crowdfunding and its Different Models?

The act of raising funds from multiple investors and donors for a business or product is called crowdfunding. The entrepreneur must share the roadmap and details about their idea, product or business on the crowdfunding platform. The interested investors or the donor after checking the details about your business requirement will get in touch with the founder to start the funding process. Different models of crowdfunding for businesses are:

1. Reward-based Crowdfunding

The entrepreneur must offer certain benefits in terms of upcoming services or products to the donors and investors as the reward to keep them involved in funding the business is called reward-based crowdfunding. The creative businesses like fashion accessories like beauty products, jewelry, personalized stationery or apparel designing can use this type of funding.

2. Equity-based Crowdfunding

As the name suggests, the entrepreneurs have to offer company share or equity to the potential donors and investors, so that the investors can earn big returns on the investment in the future. The business that is involved with technology-driven devices or application-based systems opt for equity-based crowdfunding. Due to the presence of a high degree of risk, the investors must have thorough knowledge about the business. Even the entrepreneur has to bear the risk of telling outsiders about in and out of their business.

3. Lending-based Crowdfunding

The investor will get a fixed rate of return as in payment of interest against funding done by them in the business. The equity-based and lending-based crowdfunding differ from one another as in the former the investor will earn a higher rate of returns depending upon the growth of the business. 

Why is Equity Crowdfunding Not Very Popular?

Amongst the following crowdfunding categories listed above, equity crowdfunding is known for involving a higher amount of risk as the generated investment is unregulated. In this crowdfunding, the investor seeks detailed information about the business plan; then, they will give the funding against the equities of the company.

The lack of information about the business plan and potential frauds or chances of business failure are some reasons why investors don’t like the idea of crowdfunding for startups and that too equity-based crowdfunding.

Future of Crowdfunding

One can say that funding is essential for all the startups, and it is becoming more and more popular with each passing day. Getting funds from the family and friends can be a tad tricky, and thus it becomes essential for the entrepreneur to source the funds from some outside source. What will be better than crowdfunding? It is a less complicated and hassle-free approach for the entrepreneurs by which they can arrange funds for their business.