Can you make money with Crowdfunding
For small startup businesses, it can be quite an uphill task trying to get a loan from a bank or any other investment platform to tap into your business. However, in recent years, thanks to technology, this nightmare is slowly coming to an end. ...
For small startup businesses, it can be quite an uphill task trying to get a loan from a bank or any other investment platform to tap into your business. However, in recent years, thanks to technology, this nightmare is slowly coming to an end. With what is now referred to as crowdfunding, you can get contributions from people who have the money and are willing to help you start or advance your business.
What is Crowdfunding
The meaning is really in the name. It is a process of raising small amounts of money to fund your project from a variety of different people or organizations who believe in your ideas. Their small contributions will help you reach your total goal.
Depending on the type of crowdfunding you use, contributors might or might not expect anything in return. The different types of crowdfunding include;
- Donation-based crowdfunding: This is where people donate money to help reach a certain goal without the expectation of gaining anything in return.
- Reward-based crowdfunding: with this, everyone who donates to help you reach your goal will be rewarded with something linked to the project or cause they are supporting. The rewards will differ from one person to another depending on the amount they contributed.
- Loan-based crowdfunding or Peer to Peer business lending: with this, people lend you money to help towards your project for a set interest rate.
- Investment-based crowdfunding or Equity crowdfunding: This is where people invest in your business and in return they get a stake of the business.
With loan-based and investment-based crowdfunding, it is clear that you can turn these investments into a source of income. However, just like any other investment, you need to conduct a thorough evaluation of the business before investing your savings.
How to make money with Crowdfunding
Investing in businesses
Since the introduction of the Jumpstart Our Business (JOBS) Act, crowdfunding websites have been popping up all over the internet. These sites aim to provide investors with access to business startups or those that seek to expand and require cash. To sign up on these websites, you will need to provide your personal information as well as your bank account information. Will these, you will now be able to start making investments.
As mentioned earlier, there are a ton of crowdfunding websites that you can get on to start investing. Example of popular crowdfunding websites include NextSeed and SeedInvest;
This is a popular crowdfunding website that allows you to invest in small businesses in your community by funding them with money. As an investor, you are then promised good returns from the business. Getting started on NextSeed is easy as you only need to sign up with your email then set up a NextSeed investment account, usually hosted by a partner bank. This is to enable you to transfer funds in and out of your investment account. For NextSeed the initial investment cost is just $100.
This is great for investors who not only seek to lend money but also own a share of the company they are investing in. All you need to do is to sign up on the site then look through their list of available investment options. Once you find one that looks promising and would like to invest in, you are required to invest at least $500.
SeedInvest will then hold onto your cash until the company you invested in is listed on the stock exchange then you will reap the benefits of your investment.
Risks associated with investment crowdfunding
Crowdfunding is still somewhat of a new concept. Also, investing in a new business is a great risk in itself especially since the business might not pick-off. The main risks of investment-based crowdfunding include:
- The business might fail during its startup years. This will cause you to lose all your money.
- Shares may not rise meaning that you will not get any returns.
- The crowdfunding platform might go under. If you were yet to get your returns, this means that you lose the money you had invested.
How to reduce these risks
Before investing, carry out your research to determine whether the crowdfunding platform is registered. This however does not apply to donation and reward-based crowdfunding platforms since they are not governed by any financial body.
Ensure to only invest money that you can afford to lose. Ideally, this should not be more than 10% of your available resources.
In case of any eventuality, you can always contact the Financial Services Compensation Scheme to file your complaint such as claiming your money from the crowdfunding website goes under.
Owning a crowdfunding site
This is a great option if you are seeking to help people find the right funding for their businesses and making money while at it regardless of whether it is a donation or an investment crowdfunding. Some popular crowdfunding sites you might know include GoFund, FundMe, Indiegogo, SatrtSomeGood, KickStarter and InDemand amongst others. Listed below are a few pointers on how to make money as the owner of a crowdfunding platform;
This is the money paid to the site for every project that has been completed successfully. In most cases, the fee is usually a percentage of the total amount raised from the campaign.
Platforms that run based on membership fees charge business owners a certain amount per month. This allows them to run as many campaigns as they would like for the entire month.
This is mostly for the peer-to-peer lending type of investment. As the owner of a crowdfunding site, you can choose to charge a certain fee for both the lender and the borrowers or you can decide to charge a fee only to the borrowers. These fees can be in the form of profile screening or an annual margin on the outstanding balance.
Promotions and ads
Running promotions and ads can help campaigns reach more people hence increasing their chances of being a success. This, therefore, raises another opportunity for the owner of a crowdfunding platform to make more money. Businesses that pay for ads will have their campaign have featured placement on the site.
Another way to make money is by offering consultation services on how to run a successful campaign. This is especially useful for crowdfunding newcomers.
Investment of any kind has always been a game of risks and chance. Therefore, before making any type of investment, it would be wise to conduct extensive research on the crowdfunding website you seek to invest with as well as the businesses you seek to fund.