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What is “crowdfunding” ?

Ever wondered what the fuss is about ?

“Crowdfunding” is a way of raising finance by asking a large number of people each for a small amount of money. That’s it !.

Until recently, financing a business, project or venture involved asking a few people for large sums of money. Crowdfunding switches reverses the idea, using the internet to talk to thousands – if not millions – of potential funders.

Typically, those seeking funds will set up a profile of their project on a website. They can then use social media, alongside traditional networks of friends, family and work acquaintances, to raise money. There are three different types of crowdfunding: donation, debt and equity.

Donation/Reward crowdfunding
People invest simply because they believe in the cause. Rewards can be offered (often called “reward crowdfunding”), such as acknowledgements on an album cover, tickets to an event, regular news updates, free gifts and so on. Returns are considered intangible. Donors have a social or personal motivation for putting their money in and expect nothing back, except perhaps to feel good about helping the project.

Debt crowdfunding
Investors receive their money back with interest. Also called peer-to-peer (p2p) lending, it allows for the lending of money while bypassing traditional banks. Returns are financial, but investors also have the benefit of having contributed to the success of an idea they believe in. In the case of microfinance, where very small sums of money are leant to the very poor, most often in developing countries, no interest is paid on the loan and the lender is rewarded by doing social good.

Equity crowdfunding
People invest in an opportunity in exchange for equity. Money is exchanged for a shares, or a small stake in the business, project or venture. As with other types of shares, apart from community shares, if it is successful the value goes up. If not, the value goes down.

So that’s it in a nutshell. Here is a good website to help educate yourself;

http://www.ukcfa.org.uk/