Growing an SME is not easy. Even if you have the guts, the willpower, and the persistence, financial problems can easily affect, or even sink your business. For years, many small-business owners rely on bank loans to fulfill their working capital needs. However, bank loans are not always suitable to fulfill the financial needs of SMEs. If you need working capital in today’s market, crowdfunding may be the best alternative option for you. Here’s a quick guide to crowdfunding.
What is Crowdfunding?
Crowdfunding is a way to raise money, awareness, and support for a project or a business from the people around you. It’s all about how you persuade each individual to give you a small donation or capital for your project or idea.
Crowdfunding allows people with great ideas but lack financing to raise the money they need to turn their initiatives into reality. In return, the donors and lenders will get rewarded. Essentially, the public will back your idea with their money and the project owners (aka you) can ‘thank’ them with rewards that reflect the money donated. The form of reward depends on the type of crowdfunding.
Main Categories of Crowdfunding
There are 4 different types of crowdfunding that you should know before you choose the option which is most suitable for your business. They are:
In this category, backers (or your investors) each contribute a small amount of money in exchange for a reward. The reward is often, but not always, the final product your project or business needs financing to create. Some examples of rewards-based crowdfunding platforms include Kickstarter and Indiegogo.
As the name suggests, a donor will donate a small amount of money to a project without expecting any material returns after the donations (think charitable donations!). Some project heads will express gratitude and recognition to the donors, maybe even consider small rewards. But usually this type of crowdfunding is non-profit and is utilized to raise money for charitable causes. One such example is GIVE.asia.
Equity crowdfunding is commonly used to raise money to fund the launch or growth of a new company. When an investor backs a project or company with his capital, he will not receive a physical reward. Instead, he will get a small piece of equity in the company itself. Equity-based crowdfunding is similar to getting capital from angel investors or venture capitalists. In fact, new companies and startups can choose to raise money from both equity-based crowdfunding and venture capitalists.
4. Peer-to-peer lending
Some may refer peer-to-peer (P2P) lending as debt-based crowdfunding. Investors are also called lenders, and they will individually loan some money to a borrower via a peer-to-peer lending platform. Peer-to-peer lending is open to more than one investor until the target loan is filled. The peer-to-peer lending platform, as an intermediary, will facilitate a borrower with their requested financing. The P2P lending business model tends to be most favorable to SMEs and other small businesses, as SMEs often need quick capital and the P2P lending process is fast, simple, accessible, and online based. With a P2P loan, an SME can use the funds to grow its business while an investor gets to repayment plus interest over time.
Crowdfunding can be a big opportunity for your business, as it offers a faster, easier process for financing. Just pick a category that suits your needs most. Good luck!
Related: Debt vs Equity Crowdfunding
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