Crowdfunding is a way of raising finance by asking a large number of people each for a small amount of money. Traditionally, financing a business, project or venture involved asking a few people for large sums of money. Crowdfunding switches this idea around, using the internet to talk to thousands – if not millions – of potential funders. Typically, those seeking funds will set up a profile of their project on a website such as those run by our members. They can then use social media, alongside traditional networks of friends, family and work acquaintances, to raise money. Below is a brief description of each of the different type of crowdfunding.
The first online crowdfunded project is thought to have occurred in 1997. Rock band Marillion were unable to afford to tour after the release of their seventh album so American fans used the then fledgling internet to raise $60,000 so they could play in the US. Although the band wasn’t involved in the first round of fundraising, they have since used the same techniques to successfully fund the production of their following three albums. Since then, this marketplace has grown substantially.
There are some types of crowdfunding:
Non-monetary return: Rewards and donations
Financial return: Equilty and debt
Also known as peer-to-peer (P2P) lending, it is a means for investors to lend their money to entrepreneurs for fixed periods of time and at fixed interest rates that provide them with a better ROI than regular retail banking opportunities.
The main advantages of debt crowdfunding for lenders are the security of fixed repayment dates and relatively generous levels of returns. For borrowers it provides lower interest rates than available from retail financial service providers, faster approval, and they retain their equity levels in their business.
The main roles of the platforms are to create the marketplace to connect the lenders and borrowers, undertake due diligence to verify the authenticity of the borrowers’ claims, and facilitate the financial transactions.