Raising Business Start-Up Capital through Crowd Funding
Most of us are familiar with the traditional methods of obtaining funding to start a business—personal savings, angel investors, bank loans, even friends and family. Today a popular new means of helping people fund projects and start new businesses has emerged: crowd funding.
What Is Crowd Funding and How Does It Work?
Crowd funding brings donors/investors together with people seeking funding for their project or senior care business. This can include filmmakers, musicians, and business start-ups, as well as established businesses and people fundraising for social and political causes, among others.
The two main models of crowd funding are donation-based funding and investment-based funding. Let’s further break these down into specific kinds of funding.
- Donation-based –– In donation-based funding, the donor doesn’t receive anything in return for their contribution, but simply contributes because they believe in the project or venture.
- Reward-based –– Also known as “perk-based” funding, in reward-based funding the donor receives some type of reward, often a copy of the product they donated to help create, or sometimes a discount for services.
- Lending or debt-based –– In this model investors lend money with the expectation of future repayment with interest. This type of crowd funding may be more likely to attract funders since it generates a return for the investor.
- Equity investment –– Until the JOBS Act was passed, this type of crowd funding wasn’t possible, due to SEC regulations. With this model, funders receive an ownership interest or a portion of the profits from their investment.
- Royalty-based –– Once the project or venture is generating capital, this type of funding gives investors a percentage of that revenue.
Crowd funding and lending have exploded in recent years, and will likely increase in popularity. While crowd funding can present a viable means of obtaining needed start-up capital, it’s important to read the fine print carefully and understand the fee structures, which can typically be found in the FAQs section of crowd funding websites.
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