Crowdfunding has become quite a craze these days. Social media, newspapers, etc. are focusing quite a lot on it. Off lately, people have even started understanding what this term means. But there is still a lot of confusion going on. To properly understand this, one must know the types of crowdfunding – Crowdfunding Equity, Crowdfunding Debt, Reward-based Crowdfunding and Donation-based Crowdfunding.
- Crowdfunding Equity – Equity based crowdfunding works on the theory – People invest some money in a company, and in return they are given some stake in the company.
- Crowdfunding Debt – In debt-based crowdfunding, the lender provides money to the company. While they receive a debt instrument that pays interest return.
- Reward-based Crowdfunding – In reward-based crowdfunding, the backers get some rewards for investing in specific projects.
- Donation-based crowdfunding – Donation-based crowdfunding simply functions like other donations where people donate some money for a cause.
While the last two are quite simple, crowdfunding equity and crowdfunding debt are a bit confusing. There are no regulations of the last two. But there are some rules which have to be followed from crowdfunding equity and Crowdfunding Debt.
These two different types are meant for different purposes. Though both of them are really good. But if used at proper places, they can be quite a lot fruitful. Let us understand both of them in detail. And even know which one is better for you.
Crowdfunding Equity
As mentioned above, in crowdfunding equity, backers get some shares of the company. Crowdfunding equity is a great option for the businesses who are unsure about the rate of success of their business. Their business might yield a profit in the longer run. But it might not be possible for them to fund the regular interests.
The good part about crowdfunding equity is that even middle-class people can now participate in this. Previously, only wealthy individuals could benefit from equity investments. But with the advent of equity-based crowdfunding, this problem has solved.
The minus point of equity crowdfunding is that the company gives away some stake to the backers. Sometimes young companies end up giving too much of stakes in an attempt to raise funds. This creates a disturbed and imbalanced situation wherein the company cannot function properly.
Crowdfunding Debt
Debt based crowdfunding is suitable for a company which is less stable in terms of revenue growth. As in the case of crowdfunding equity, they are not sure that their business would be fruitful. Thus, even the backers might not be willing to fund them if they opt for crowdfunding equity.
Debt based crowdfunding doesn’t provide the security like equity crowdfunding. In crowdfunding equity, the backers are securing the goodwill of the company. Whereas in debt based crowdfunding, the lenders are more directed towards their payments.
This type of crowdfunding is more suitable for the people who have some assets to be mortgaged. And also have the adequate cash-flow to finance the interests.
Crowdfunding equity and crowdfunding debt, both are great ways of fund-raising. The best one for you depends on the type of company you own and the requirements of your company.
