Crowdfunding, Crowdinvesting or Crowdlending? Which is right for you and what’s the difference?
Three words that might often confuse a reader when embarking on a journey in the capital raising world. Essentially all three terms enable the interested party to benefit by using the power of the many.
What is crowdfunding?
Crowdfunding as a concept has grown and gained momentum over the last years. Crowdfunding can be explained quite simply as a concept where the crowd invests smaller amounts of money into a company, product or idea to either bring the project to reality, expand the business or build new services within existing product / service cycles.
At this point we are sure you are wondering what is the difference between crowdfunding and crowdinvesting. This can be split into two separate categories of investment depending on the type of business, history and goals
Type 1: Equity Crowdfunding (also known as Crowdinvesting)
Who is this for: Usually this type of crowdfunding would suit the needs of SMEs who have a proven track record and are looking to expand their business.
In equity crowdfunding, companies raising capital are not offering their investors a reward like a newly developed product for their investment but rather a small percentage of their business.
Traditionally, companies or individuals would look for either bank loans, VC’s or Angel investors in an effort to secure the capital investment necessary to achieve their goals. Crowdfunding has changed that, democratising the process and allowing individuals (as well as VC’s and Angel Investors) looking to invest, to easily reach companies looking to raise funds.
Online equity crowdfunding platforms such as Eureeca, bring the interested parties together in a one-stop-shop approach. Investors can build a diversified portfolio of companies they are interested in, which have been structured and presented by the SME in an orderly manner to make it easy for the investor to source all the information they may need. If the process was to be described in one sentence we would say that, SMEs and Investors from around the world, are brought together in a safe and reliable environment.
When viewed at scale, investments (either small or larger) allow SMEs to leverage the power of the crowd in funding their goals whilst at the same time creating brand ambassadors and expansion potential. The investors would get a share of the business in return for their investment which, in time, would potentially offer them the possibility for enhanced ROI (Return on investment).
One of the biggest advantages of equity crowdfunding is that the investors acquired can bring in expertise which will help the business expand.
Type 2: Crowdfunding (rewards based)
Who is this for: Reward based crowdfunding is most suitable for new companies (with no previous history or track record), concepts or ideas looking to finalise their product and launch it to the market of their choice.
This is the most common type of crowdfunding used whereby investors get rewarded for their investment, receiving exclusive benefits once the product is launched. For example, this could apply to a new tech gadget that has been developed based on the contributions of the crowdfunding campaign. The investor would be one of the first to get their hands on the newly launched product.
One of the biggest advantages of rewards based crowdfunding is that it allows the company raising funds to do market research as well as get feedback on their new products, create a fan-base and create a publicity campaign
What is Crowdlending?
The concept of crowdlending once again depends on the power of the mass. As the name suggests, in this case the SME is raising a loan from individual investors rather than borrowing funds from a traditional bank.
This is essentially the fastest crowdfunding concept, but has increased risk for both the SME raising capital as well as the investor. The SME needs to account for the fact that the money received is essentially a loan and will therefore have to be repaid. The loan factor also raises questions about the interest rates, which can be quite high.
As can be clearly seen from the above, there is a big variety of options available, each with their advantages and disadvantages depending on the needs of your project. Research carefully before deciding which one is right for you.
Raising money from investors is a long process and for increased chances of success, one should carefully plan for it, considering all options available. Make sure you choose a platform that suits your needs and can offer support throughout your Crowdfunding, Crowdinvesting or Crowdlending journey.