What is Crowdfunding?

What is Crowdfunding?

Crowdfunding is an online initiative that allows a “crowd” to fund a project or business, rather than one or two major investors. There are four different types of crowdfunding: rewards crowdfunding, donation crowdfunding, debt crowdfunding and equity crowdfunding.

To run a successful crowdfunding campaign, you need to capture the attention of a large number of people called backers and convince them that your project is worthy of their investment.

I will use this guide to explain how startups and small business owners can use crowdfunding to fund their business.

Crowdfunding is a situation where businesses, organizations or individuals fund a project or venture with small donations from many people. By receiving the necessary boost to cash flow, small businesses can get off the ground or launch new projects. Most of these campaigns happen via internet platforms, and their are set time frames for when money can be raised.

There are four kinds of crowdfunding campaigns you can use for your business. Donation-based funding makes it possible for contributors to give you money without you paying anything back in return. Equity crowdfunding allows backers to get shares of the business. Debt-based crowdfunding allows donors to be repaid with interest. While Reward-based crowdfunding allows contributors to receive tokens, products or services in return for their donations.

Types of crowdfunding

The four types of crowdfunding allows you to receive money from interested donors. Here’s a breakdown of each one:

  • Donation Crowdfunding: Donation-based crowdfunding allows people to give a campaign, company or person money for nothing in return. Let’s say you create a crowdfunding campaign to purchase new equipment for your business. The people who give you money do it out of support for the growth of your business and nothing else.
  • Debt Crowdfunding: Debt-based donations are nothing but peer-to-peer (P2P) lending, which is a form of crowdfunding. In debt-based donations, the money pledged by backers is a loan and must be repaid with interest by a certain deadline.
  • Rewards Crowdfunding: This happens when donors receive something in return for their donations. The rewards vary by the size of the donation, which incentivizes higher contributions. Depending on how much money participants give to a campaign, they may receive the product or service – often at a discounted rate.
  • Equity Crowdfunding: While other crowdfunding campaigns don’t allow backers to own a portion of the company they’re supporting, equity-based crowdfunding does. Small businesses and startups will give away a portion of their business in exchange for funding. These donations are a type of investment, where participants receive shares in the business based on how much money they have contributed.

Successful Crowdfunding Websites You Can Use

Crowdfunding for education

1. DonorsChoose

This nonprofit crowdfunding platform makes it easy to raise money for any classroom in need of funds online. Public school teachers across the US use the site to create classroom project requests.

Fees: Third-party payment processing charges of 1.5% represent the weighted average of fees across all payment methods used by donors. Credit card or PayPal donations include a fee of about 2.5%. The site charges no platform fee, as operating expenses are covered by voluntary donations to the nonprofit.

2. GiveCampus

GiveCampus partners with colleges to help students, alumni, parents, and faculty launch fundraisers for school-related projects. Funds raised go directly to the school itself. They also offer a volunteer management system.

Fees: Schools can opt-in for a monthly subscription to use GiveCampus. Schools can contact GiveCampus for a quote.

3. Piggybackr

Piggybackr provides a school fundraising platform where parents and students can raise money (as a team or individually) for school projects. Piggybackr gives students points and badges for their fundraising efforts.

Fees: Platform fee of 4%, along with 2.9% + $0.30 per transaction for payment processing.

Personal crowdfunding and online fundraising sites for nonprofits

4. GoFundMe

GoFundMe is the world’s largest social fundraising platform for individuals, teams, and nonprofits with a giving community of more than 50 million worldwide. It is one of the best crowdfunding sites for personal fundraising. More than $5 billion has been raised, and it’s the first and only platform with a donor protection guarantee. GoFundMe has Customer Happiness agents available 24/7.  Check out honest GoFundMe reviews.

Fees: Powered by donors™, GoFundMe offers fundraising. There is a 0% platform fee for organizers plus standard payment processing fees of 2.9% plus $0.30 per donation.

5. FundRazr

This platform helps individuals, nonprofits, and companies to crowdfund for causes they care about. They offer both keep-it-all fundraisers or as all-or-nothing fundraisers, meaning you don’t get access to your funds until you’ve reached your goal.

Fees: Individuals can choose a fundraising model with no platform fee for organizers(supporters are asked for optional tips) and organizations can choose a “professional” model with a 5% platform fee.

6. Fundly

With Fundly, either individuals or nonprofits can create digital fundraisers for a wide range of causes, including fraternities and sororities, military, and politics.

Fees: It’s to start a fund on Fundly, but every donation will have a 4.9% platform fee deducted, as well as a payment processing fee of 2.9% plus 30 cents.

7. GoFundMe Charity

GoFundMe Charity is one of the best crowdfunding platforms for nonprofits and uses social fundraising and other features to make a difference. It can help with ticketing and registration, offer you donor data, and team fundraising.

Fees: Platform fee: 3% to 5% of funds raised, plus a payment processing fee of 2.4% to 2.9% plus a set $0.30 per transaction. Premium and enterprise models with advanced features and services available.

8. Classy

Classy an online fundraising site that is designed for nonprofits and social enterprises, and the site comes with a fundraiser reporting tool to help track fundraising progress. Another site feature helps teams organize volunteer events, including ticketing and event registration.

Fees: The platform doesn’t disclose pricing for premium offerings (contact the site for a quote), but services start at $499 per month.

Crowdfunding for creative projects

9. Kickstarter

Creators seeking funding for particular projects can use the site to bring the project to life. Creators (ranging from individual designers and inventors to large corporations that want to test new product ideas) offer backers rewards, such as a small piece of the project, the first available prototypes, or the products that they are raising money to manufacture. You must raise all the funds you need, or get nothing.

Fees: Service fee of 5%, along with 3% + $0.20 per transaction for payment processing. All or nothing.

10. Indiegogo

If you want help at every stage of your creative or entrepreneurial project, this site offers tools to help you get the job done, from pre-launch to crowdfunding and distribution. You can choose either an all-or-nothing fundraising experience or flexible funding.

Fees: Platform fee of 5%, along with 3% + $0.30 per transaction for payment processing. They have an international transfer fee of $25 when sending funds to banks outside of the US.

11. Patreon

This platform allows you to build a fundraiser to gather recurring patronage for your art or other creative projects in the form of monthly subscriptions from fans. Patreon encourages users to offer rewards to fans as a way to repay them for their support.

Fees: They have a Patreon fee of 5%, along with 3% to 5% plus $0.25 to $0.35 for payment processing. They also have “payout fees” of either $0.25 to $0.35 or 1% per payout (capped at $20 for PayPal disbursements). Additional fees apply to payments made by international donors. In other words, you may find the fee structure a bit confusing.

Equity crowdfunding

12. Fundable

Fundable focuses on helping entrepreneurs, startups, and companies raise capital from the public through business crowdfunding. The site allows users to offer either rewards or equity in return for financial support.

Fees: $179 a month, along with 3.5% + $0.30 per transaction for payment processing.

13. WeFunder

If you want to grow your existing business, WeFunder can help you get funded. Your investors receive a small stake in your company, and the platform aims to increase their emotional investment in your success.

Fees: It’s to start a company profile but they charge a service fee ranging from $7 to $75 depending on the investment size and 7% of total funding volume for Regulation Crowdfunding. For Regulation D they charge up to 20% Carried Interest and for Regulation A+ Wefunder does not charge any fees.

14. Crowdfunder

This equity crowdfunding platform allows businesses to sell shares to accredited investors. Crowdfunder has a network of 15,000 venture capitalists and angel investors.

Fees: Subscription models range from $299 per month to $999 per month.

15. Seedinvest

As an equity crowdfunding platform, Seedinvest allows startups to raise funds from individual investors and venture capital firms. Entrepreneurs must meet their minimum funding goals before investments are made final.

Fees: They have a 7.5% placement fee with a 5% warrant coverage or equity, plus a $0 to $10,000 fee for escrow, marketing, and legal expense reimbursements.

Real estate crowdfunding

16. PeerStreet

This donation website offers private real estate loans from accredited investors. As a testament to its transparency, the site also opens up past investments to review and scrutiny. Loan duration is between six and 24 months, with a loan-to-value ratio usually under 75%.

Fees: 0.25% to 1% service fee on the total loan amount.

17. RealCrowd

A crowdfunding site for commercial real estate equity investments, RealCrowd aims to take the middleman out of real estate investing. Accredited investors can browse, compare, and invest.

Fees: They have a base listing fee of $15,000. Fees charged to those who list investments, not investors.

18. RealtyMogul

This site brings its users together to invest in residential and commercial real estate. Both accredited and non-accredited investors can use the platform. Each investment has a fee that varies depending on whether the investment is a loan or an equity purchase. It is a solid choice as far as real estate crowdfunding sites go.

Fees: Minimum investment of $1,000.

Niche crowdfunding

19. Honeyfund

For engaged couples or newlyweds entering the next stage of life, this crowdfunding site helps raise funds for a wedding, honeymoon, or even the down payment on a new home.

Fees: It’s to register for gift cards and Honeyfund balance but bank deposits cost 2.8% + $0.30. They offer Honeyfund Elite, which offers more in-depth fundraising services for $39.99.

20. Slated

Slated is an equity crowdfunding site for movies. This start-to-finish platform helps with funding film projects, finding talent, and distributing the final project. It also provides the option of extended services such as script and financial analysis for an additional cost.

Fees: Their Executive Producer Services fee is 2% to 10% of the project’s budget and 5% to 10% of the back-end after recoupment plus 20%.

21. Experiment

A crowdfunding site dedicated to scientific research, Experiment helps researchers raise the funds they need to pursue new discoveries and technology. Backers can review their impact through open access to data and the resulting journal publications.

Fees: Platform fee of 8% with 2.9% + $0.30 payment processing fee. They only offer an all-or-nothing fundraising model.

Crowdfunding rules

Most crowdfunding sites have specific rules. Kickstarter, for example, doesn’t allow equity crowdfunding and has a list of prohibited items that you are not allowed to include in your project. It’s wise to read these rules thoroughly before choosing a platform so you don’t have to halt your campaign before it even starts.

If you ignore the rules and jump into your crowdfunding campaign, the likelihood of success plummets. You need to adequately research the different crowdfunding sites so you understand which platform works best for your business.

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