There are at least five types of crowdfunding to choose from, with each type possessing different benefits for investors and borrowers. As an investor or borrower, you need to decide which one of the five is best for you.
But first, what is crowdfunding?
The term has a number of definitions, but in a nutshell, it is a term used to describe a method used by an individual or a business to get money by seeking small chunks from a large number of investors or people who want to loan out their money.
There are five (5) main classes of crowdfunding campaigns based on the individual distributing the money can expect to get in return. The five categories include (1) crowdlending, (2), Reward-based crowdfunding, (3) Crowdinvesting, (4), Donation-based crowdfunding, and (5) Invoice trading.
Crowdlending
Crowdlending or P2P or peer to peer lending or marketplace lending is a type of crowdfunding investment where investors co-finance a business or project by lending money in form of loans to the business owners or borrowers, in return of interests. On average, crowdlending can generate a return on investment of 12 to 14 % per year.
Peer to peer lending allows the investors to access large investments that they would not be able to on their own.
The first-ever P2P lending platform was the UK-based Zopa, which was founded in 2005.
Reward-Based Crowdfunding
This type of crowdfunding is a campaign where individuals contributing money can expect to receive a reward that corresponds to the amount that they contributed. In this crowdfunding campaign, the reward can be a product or service that the funded company produces or provides or a discount to acquire the product or service. There are three (3) levels of rewards based on the amount of contribution.
Crowdinvesting
Crowdfunding is also called equity-based crowdfunding and is an equity-based crowdfunding campaign where a person contributing funds can expect to receive a return in the form of pert ownership of the business that is raising funds. This means that the company running the campaign is selling off a portion of its own such as shares or membership interest to each of the individuals who contribute money. Assuming the company performs well, the individuals contributing money will receive the shares of the profits in the form of a dividend or distribution.
This form of crowdfunding is being used predominantly by entrepreneurs and startups seeking for an alternative to angel investors and traditional venture capital when looking for a capital injection to grow their business.
Donation-Based Crowdfunding
This type of crowdfunding is more straightforward than the other five. As it is in the name, this is a category of funding campaign where the lender does not expect to get anything in return for his or her contribution. In this type of funding, the money is given as a way of supporting the idea or a cause.
Donation-based crowdfunding is usually a great option if the business or the investor wants to foster a social cause, charities, or community projects.
Invoice Trading
Invoice trading is where investors buy unsettled business invoices at a discount and receive a return consisting of the difference between what they pay for the invoices and the amounts stated on the invoices themselves.
By using the principles of peer to peer lending, this type of funding campaign allows businesses to sell their invoices through an online platform in order to boost cash flow. It is the quickest way of linking struggling businesses with investors seeking short-term returns through online auction sites.
Invoice trading is just one of the many invoice finance options that have emerged as a part of Fintech disruption of conventional banking systems, and sometimes is also referred to as auction-based invoice finance.’
The cost of invoice trading usually varies depending on the size of the invoice offered, the terms provided, and the nature of the industry the business seeking to raise funds operates. Typically, a borrower will receive around 75% of the value of their invoice at 2-3% interest rates per year in addition to a transaction fee charged per amount funded.