Crowdfunding is the process of raising funds for a cause by asking a large number of people for money. Commonly carried out online, organizations, businesses, and individuals can use it to raise money for a charitable cause or to start a business.
There are many crowdfunding sites, like Ketto, that help people raise funds immediately. There are many types of crowdfunding that you can donate to, but it can be complicated if you are new to things. Let us discuss crowdfunding types to clear up these doubts.
Here are the different types of crowdfunding.
Debt-based Crowdfunding
Debt-based crowdfunding is a system in which an investor gives money for a cause in exchange for interest on the money. Usually, this type of crowdfunding funds people who need large sums of money. It is used to fund startups and helps companies finance mergers. It is almost the equivalent of a loan. You must be wondering why people would opt for debt-based crowdfunding over bank loans.
There are many advantages to this type of crowdfunding over traditional bank loans. You get money at a lower interest rate. It has a more flexible way of repaying loans as compared to banks. If your project gains popularity, more and more people will be willing to lend money. It is always a good idea to get a clear idea of how much the interest rate is before fundraising. However, debt crowdfunding is not a good idea for new companies because you have to repay the money you get.
Reward-based Crowdfunding
Reward-based is a pretty prevalent type of crowdfunding. It commonly funds companies and small businesses. In this type of crowdfunding, you get funds in exchange for rewards corresponding to the amount you receive. The rewards depend on the amount. For example, if you receive a thousand rupees, you can buy a product from your company. But if the amount is large, you need to think of a bigger reward.
Reward-based crowdfunding can go on for one to three months. It is an excellent idea if you do not want to go for traditional loans. You do not lose a part of your company, and it is a cheap way to raise capital for your company. But if you are someone who needs a large sum of money, this may not be best for you. If your company does not gain attention, you may have to return any money you raise because you could not reach the goal. So, strive to be consistent on social media and try ways to attract more people consistently.
Royalty-based Crowdfunding
Royalty-based crowdfunding, also referred to as revenue-based crowdfunding, is a common financing system. Investors fund companies in exchange for the revenue they gain once they become capable of doing so. Revenue-sharing contracts have lower rates of interest, which can be pretty helpful for new companies that cannot afford higher rates.
The payment you make for this type of is in the form of the sales that a company makes on the sale of products. They are a better alternative to traditional loans because the processing time for them is low. You can adjust these funds for flexible monthly repayments as well, so that you can pay them back effortlessly. It is helpful because there can be times when a company may not be doing well. But at those times, you will not have to worry about paying back a lump sum. They are also a good option if you need large sums of money.
Equity-based Crowdfunding
Equity-based crowdfunding is an excellent option for companies that are starting and need loans. In this type of crowdfunding, companies get investments in exchange for shares in the company. It opens new opportunities for new businesses by giving them a large pool of investors to help them. With equity-based crowdfunding, you can set a minimum amount that investors can provide to your company.
It gives you control over how much equity you provide. Investors may ask to view some documents relating to your company. But you always have the option to deny their requests. However, there are a few risks associated with it. There are chances of dilution. For example, if you invest in a company and it starts raising more capital, later on, your percentage of shareholding will reduce in the company. Investors will also not see any profits because they have to sell shares for that.
Donation-based Crowdfunding
It is the most common type of crowdfunding. In this way, the funders donate to a cause without getting anything in return. It is different from the reward-based crowdfunding system, in which investors get something in return. Donation-based crowdfunding commonly funds charitable causes and lasts up to forty to sixty days. The purpose can be anything big or small and may or may not have any limitations.
When using online platforms like Ketto, there are no limitations to the amount you can pay. But when opting for this type of crowdfunding, it is essential to be cautious. Try to use well-known platforms so that you can track the progress of your funds. If you need funds, you can promote your campaign beforehand on social media to generate awareness. Donation crowdfunding is gaining attention in our country lately, thanks to Ketto and its rising popularity.
Conclusion
These are the most common types of crowdfunding that people use. The names can confuse people, but once you research and understand what they are, you can see the differences between each type. You will understand which one works well for your cause, and you can raise a fund without the fear of confusion.
If you are interested in donating to a cause, you can consider using a platform like Ketto. It is easy to use for both donors and people who require funds. You can start a fundraiser quickly and get donations from across the country. As a donor, you can access the fundraiser from anywhere, and in case of errors, you can withdraw funds immediately.
