If you have heard of GoFundMe or Kickstarter, it is likely you have some idea, but would prefer a simple answer to the question. How does crowdfunding work? Crowdfunding is not a new concept. However, in the age of social networking, crowdfunding has become a loaded mainstream term. It suggests more than just an alternate method for financing. 

If you have heard of GoFundMe or Kickstarter, it is likely you have some idea, but would prefer a simple answer to the question. How does crowdfunding work? Crowdfunding is not a new concept. However, in the age of social networking, crowdfunding has become a loaded mainstream term. It suggests more than just an alternate method for financing. 

Now, crowdfunding combines traditional fundraising with the power of social networks. But how does crowdfunding do that exactly? How does crowdfunding work? Fortunately, our article breaks down the basics of crowdfunding so you might see how it could be a viable tool for you. 

What Is Crowdfunding?

At its core, crowdfunding is an alternative form of financing that uses crowdsourcing. Traditional fundraising involved applying for bank loans or pitching to major investors. Instead, crowdfunding raises funding for ventures by asking for small donations or investments from regular people. 

Crowdfunding is a much more personal form of fundraising. Through platforms and social media, you can connect with your backers more directly than before and have more control over how your business’s story is told. Also, you have access to information and opportunities that were once only available to a privileged domain of investors. 

How Does Crowdfunding Work? 

Let’s get to the heavier question: how does crowdfunding work?Crowdfunding is an all-encompassing term that can be accomplished in several ways. 

Four Methods of Crowdfunding

Specifically, there are four different methods of crowdfunding: donation, reward, equity, and debt-crowdfunding. Each has a different way of answering “how does crowdfunding work?”. It is just a matter of picking which one is right for you and your project.

Donation Based Crowdfunding

Donation-based crowdfunding is probably the most familiar form of crowdfunding. These campaigns are typically geared towards charities, non-profits, and social causes. They usually ask for funding based on goodwill and gratitude without offering anything in return. 

GoFundMe is one of the world’s most famous crowdfunding platform for personal fundraisers or donation-based fundraising. GoFundme is the gold standard in the donation based crowdfunding arena.

Reward-Based Crowdfunding

Reward-based crowdfunding is similar to donation crowdfunding. Through platforms like Kickstarter and Crowdfunding Bum, participants can donate small amounts of money, but the campaign offers incentives to backers. This could work well with a product-based business because rewards could be a free prototype or a chance to be involved in the project development. 

What is particularly great about CrowdfundingBum is that they do not ask much of their users. They have an 8% fee in which the 5% platform fee is waived and the remaining 3% is paid to another campaign. They work by the notion to pay it forward so that everyone succeeds in someway. With CrowdfundingBum, there are already built-in backers and pitch write-up experts at the ready for busy entrepreneurs.

Equity-Based Crowdfunding

In equity-based crowdfunding, investments are much larger than donation and reward-crowdfunding. So how does crowdfunding workhere? Through platforms like Fundable, investors are paid back with ownership of part of the company, rather than with a reward. In this case, equity-based funding raises money for the growth of a company rather than just to jumpstart a project. 

Debt-Based Crowdfunding

Lastly, we have debt-based crowdfunding. Here, funding comes from lenders rather than doners, backers or investors. With this type of crowdfunding, entrepreneurs raise money through loans that they will eventually pay back to the lenders. In turn, these lenders loan your money with the expectation that they will get the principal and interest. 

Benefits 

  • Crowdfunding is efficient. Crowdfunding, by nature, takes advantage of social networking to effectively and efficiently communicate your vision. It cuts out the middle man and directly connects you to potential backers.
  • Crowdfunding is an opportunity to refine your idea. The benefit of crowdfunding platforms is that you can communicate directly with your backers. Think of it a free, crowdsourced brainstorming. They will ask the hard questions and give you feedback that will help you take your idea from good to amazing.
  • It is marketing and media exposure in one. Because crowdsourcing takes your idea to the public eye, it is a great way to build awareness of your brand and your campaign. So much content is traded around on the internet, a feature story or a blog post shared on someone’s Facebook profile can widen your pool of potential backers.

Challenges

  • No trust no funds. One of the mistakes people make when it comes to crowdfunding is that they believe it is a free and easy way to make money. However, no one is going to give you money if they do not feel like you have a good track record or if you are not offering a valuable service.
  • Pick the Right Platform. Crowdfunding websites will all claim that their services are the key fiscal certainty. However, no two platforms are made the exact same way. The last thing you want to do is go looking for funding in a place that does not ally with your needs. 
  • Set Realistic Targets. Being realistic about your financial goals is not just important for crowdfunding but also for other financing options. If a crowdfunding campaign fails to hit its target, funding platforms will return all the investors’ funds. Also, you will be left with nothing and your reputation could be damaged to future investors. 

Let’s take it back to our big question: how does crowdfunding work? It works in a variety of ways. Crowdfunding is quickly becoming more and more complex everyday. However, that does not undercut that it is a popular and more efficient method of fundraising. It is helping more and more people get their ideas out into the world. 

Conclusion 

Traditionally, entrepreneurs had to compete for a few investors’ attention. Thanks to crowdfunding the pool of potential investors is growing. However, this does not mean the process is any easier. Just as there is more funding there are more people seeking funding. Crowdfunding is still competitive. With time, patience and effort, it could become your key to launching your next project. 

Final thoughts.

We hope you stick around a while to find out more about all that Crowdfunding Bum has to offer. You will find ample reasons to choose us as your funding source.

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