5 Types of Crowdfunding To Know About for Success

types of crowdfunding

Crowdfunding campaigns have recently emerged as a way to secure funding for projects and businesses. A successful crowdfunding campaign can be incredibly useful as a way to gain investment for your business and attract customers. In this article, we’ll explore the various types of crowdfunding that could be the right fit for business startups.

What is Crowdfunding?

Crowdfunding is a way to raise funds by using crowdfunding platforms. You’ll need to provide information about the business and what the money will be used for first and foremost with this type of funding.

You will also need to provide any other financial interest information and contact details that someone would need to know before investing. You can raise capital for a small business or obtain funding to take a product idea into reality.

What Are the Different Types of Crowdfunding?

Many types of crowdfunding options are available for small businesses and gain access to investors. So if you’re not sure how crowdfunding works, there are many types of crowdfunding available now. We’ll look at each type of crowdfunding available in more detail and ways to create successful crowdfunding campaigns.

  • Equity Crowdfunding
  • Donation-based Crowdfunding
  • Reward-based Crowdfunding
  • Peer-to-peer Lending
  • Peer-to-business Lending

1. Equity Crowdfunding

Equity crowdfunding requires businesses to sell off small shares of the company to investors with the goal of providing investors with returns as the business venture takes off.

Small and large businesses have used equity-based crowdfunding options, but the minimum investment tends to be higher. Financial documentation and business documents will also be needed for equity crowdfunding to ensure SEC compliance.

2. Donation-based Crowdfunding

types of crowdfunding - red donate key on a Mac keyboard

For non-profits, donation-based crowdfunding can be a suitable option to raise funds. The funding goal is to raise money for a specific cause.

This is the most straightforward type of crowdfunding, but it can only be used in specific situations. A donation-based crowdfunding campaign can be incredibly beneficial to raise funds for a good cause, and no shares or company proceeds need to be given back to donors since it’s all for a good cause.

3. Reward-based Crowdfunding

Rewards-based crowdfunding is done through a crowdfunding platform such as Kickstarter to gain investment. With this crowdfunding type, businesses provide information on what the money is needed for, how the company will use the funds, and outline minimum pledge amounts in tiers.

For each tier set up to invest money, donors receive perks and rewards such as early access, updates, and other benefits. As the amounts go up, the rewards go up as well to entice investors, so it’s crucial to create thoughtful rewards for angel investors.

4. Peer-to-peer Lending

Types of crowdfunding - graphic of man holding P2P with network in the palm of his hand

Peer-to-peer lending, or debt-based funding, refers to personal, unsecured loans that can be obtained from a peer-to-peer platform.

How does this type of crowdfunding work?

Many platforms are offering P2P borrowing and are bringing together lenders and borrowers in a streamlined way. So if you’re looking for an alternative source of funding for your company, P2P lending could work.

However, the loan amounts will vary based on whether it’s an individual or business borrowing and will also take credit scores, loan grades, and other factors in the approval process.

5. Peer-to-business Lending

If you’re seeking an alternative to traditional venture capital funding, peer-to-business lending can be an option.

Like peer-to-peer lending, this type of crowdfunding is based on bringing lenders and businesses together for loans. However, the loans are not given to individuals, just companies – that’s the crucial difference between P2P and P2B lending.

Lenders are also likely to provide loans to an established company rather than startups in this type of crowdfunding. The interest rate on these types of loans will differ, so that should be one of the key considerations when going for this type of funding.

Comparison of Crowdfunding Types

This table offers a quick comparison of the different crowdfunding options, including their key features, suitable candidates, minimum investment requirements, and documentation needs.

Crowdfunding TypeDescriptionSuitable ForMinimum InvestmentDocumentation Required
Equity CrowdfundingBusinesses sell small shares to investors with potential returns as the business grows.Small and large businessesHigher investmentFinancial and business docs
Donation-based CrowdfundingNon-profits raise funds for specific causes without giving shares or company proceeds to donors.Non-profit organizationsVariesVaries
Reward-based CrowdfundingBusinesses seek investment on crowdfunding platforms, offering rewards and perks to backers.Small businessesVariesCampaign details
Peer-to-peer LendingIndividuals obtain personal, unsecured loans from peer-to-peer lending platforms.Individuals and businessesVariesCredit scores, grades
Peer-to-business LendingLenders provide loans exclusively to businesses, often established ones, seeking funding.Established businessesVariesInterest rate considerations

Make sure you check out the informative video “Understanding Different Types of Crowdfunding” by docstocTV after reading:

Crafting a Compelling Crowdfunding Campaign

Creating a compelling crowdfunding campaign is essential for attracting backers and securing funding. A successful campaign clearly communicates the value of the project, resonates emotionally with potential supporters, and offers attractive rewards. Key elements include:

  • Narrative: Your campaign story should articulate the problem you’re solving, the impact of your solution, and why you’re passionate about this venture. Relate your narrative to the specific type of crowdfunding you’re using to connect with the right audience.
  • Visuals and Media: High-quality images, videos, and graphics can significantly enhance your campaign’s appeal. Use visuals to demonstrate your product, introduce your team, and convey your message more effectively.
  • Rewards Structure: Especially for reward-based crowdfunding, design a tiered reward system that offers tangible value at different contribution levels. Ensure the rewards are meaningful and relevant to your project and audience.
  • Transparency and Credibility: Be open about your goals, budget, and timeline. Use your campaign to build trust by providing detailed information about how funds will be used and the progress milestones you aim to achieve.

Legal Considerations in Crowdfunding

Navigating the legal landscape is critical, particularly for equity and debt-based crowdfunding, which are subject to more stringent regulations:

  • Regulatory Compliance: For equity crowdfunding, familiarize yourself with the regulations set forth by the SEC, including rules regarding investor solicitation, disclosure requirements, and fundraising limits. Adherence to these regulations is crucial to avoid legal pitfalls.
  • Intellectual Property Protection: Before sharing your idea publicly, ensure you have the necessary intellectual property protections in place. This may involve filing for patents or trademarks to safeguard your project.
  • Tax Implications: Understand the tax obligations that come with crowdfunding. The nature of the funds raised (donations, investments, or pre-sales) can have different tax implications for both the campaign creator and the backers.

Post-Campaign Strategies

The end of a crowdfunding campaign marks the beginning of the next phase in your venture. Effective post-campaign strategies include:

  • Fulfilling Promises: Deliver on the rewards or returns you committed to during the campaign. Timely and transparent communication about fulfillment processes builds trust and credibility.
  • Leveraging Momentum: Use the success of your campaign as a marketing tool. Share updates, milestones, and successes with your backers and on social media to maintain engagement and attract further attention to your project.
  • Planning for the Future: Consider how you’ll secure additional funding if needed. Success in crowdfunding can open doors to other financing opportunities, such as angel investment or venture capital.

Crowdfunding Challenges and How to Overcome Them

Crowdfunding presents several challenges, but with strategic planning, these can be overcome:

  • Not Reaching Your Funding Goal: Set a realistic goal that reflects the minimum amount needed to launch your project. Consider flexible funding options if appropriate. Engage your network early and often to build momentum from the start.
  • Managing Backer Expectations: Maintain open lines of communication with your backers. Regular updates about both progress and setbacks help manage expectations and foster a supportive community.
  • Dealing with Unexpected Costs: Have a contingency plan for unforeseen expenses. A well-thought-out budget with a buffer for unexpected costs can help navigate financial surprises without compromising your project’s success.

types of crowdfunding Benefits shown as money raining down on a businessman

What Are the Benefits of a Crowdfunding Campaign?

There are many benefits to raising funds through crowdfunding campaigns, such as:

  • Fast: A successful campaign can help you raise money faster for projects and doesn’t require an upfront fee. There might be processing fees involved with using a crowdfunding platform, though, so it’s best to check policies on payment processing before setting up your campaign.
  • Marketing: A fundraising campaign can build buzz for your product and get customers excited about your product or service
  • Social proof: Potential investors are always looking for evidence that a product or service is needed, and raising capital through crowdfunding can work as proof of that.
  • Low-risk: Going through traditional forms of fundraising can be stressful and involve risks, but with crowdfunding, it’s a relatively lower risk to raise enough funds.
  • Works for existing and new businesses: Crowdfunding can be useful as a cash infusion for an existing business and can also be used to raise money for a new venture.

What Are the Most Popular Crowdfunding Types?

Crowdfunding has become an increasingly popular method for raising money. However, the most popular types of crowdfunding differ based on the business idea.

Peer-to-peer lending is popular for startup companies and creative projects rather than going for equity crowdfunding. Debt-based crowdfunding has also become more common, with many online platforms offering it at a lower cost.

Is Crowdfunding Free Money?

Types of crowdfunding paybacks - graphic of jigsaw puzzle with the missing piece being equity

A crowdfunding project isn’t exactly free money. Generally, crowdfunding works on providing something in exchange for the funds raised, whether that’s equity, rewards, or another kind of agreement.

For example, with rewards-based crowdfunding, you provide investors with some kind of incentive, or with equity crowdfunding, you sell business shares in exchange for the money.

You can also use donation crowdfunding when raising money for a specific cause, typically involving small donations for your campaign goal.

What Are the Most Popular Platforms to Raise Money with Crowdfunding?

When it comes to crowdfunding, there’s a multitude of platforms to choose from. These platforms serve as the online stage for your crowdfunding campaign, making it easier to reach potential backers. Here are some of the most popular crowdfunding platforms:

  • Kickstarter: Renowned for its creative projects, Kickstarter is a top choice for entrepreneurs, artists, and innovators. It’s an excellent platform if you have a unique product or artistic endeavor.
  • Indiegogo: Indiegogo offers flexible funding options, making it suitable for various types of campaigns. It’s known for both creative projects and tech innovations.
  • GoFundMe: If your crowdfunding campaign is centered around personal causes, medical expenses, or charitable initiatives, GoFundMe is a leading platform for raising funds for such purposes.
  • Mightycause: Formerly known as Razoo, Mightycause specializes in nonprofit fundraising. It’s the go-to platform for charitable organizations and individuals looking to support social causes.
  • Fundable: Fundable caters to businesses seeking equity crowdfunding. If you’re planning to offer shares of your company in exchange for investment, Fundable can be a suitable choice.

These platforms provide various features, fee structures, and audiences, so it’s essential to research and choose the one that aligns best with your crowdfunding goals.

Images: Envato Elements, Canva

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Myra Nizami Myra Nizami is a staff writer for Small Business Trends and has been with the team for 3 years. She is also a freelance writer and researcher with a Bachelor's degree from Cornell University and a Master's from Kings College London.