What is Crowdfunding? Definition, benefits, and types

Capital is one of the foundations in a business. If the foundation that is installed is not strong, then the business that is being run will not run well. That is the reason why having sufficient funds in a business is the most important thing to prepare.

Currently there are many ways to apply for business capital loans. To be able to get better loans, business owners can take advantage of crowdfunding. However, what is crowdfunding?

Definition of Crowdfunding

Crowdfunding comes from the word 'crowd' which means a crowd or a large number of people, and 'funding' which means collecting funds. That way, crowdfunding is a fundraising technique that is carried out by many people which later these funds will be used for the purpose of an activity or business.

According to the Financial Services Authority's website, crowdfunding is a funding technique for projects or business units that involves the wider community. The concept of crowdfunding was first coined in 2003 in the United States, with the launch of a site called Artistshare.

In this site, musicians try to find funds from their fans so they can produce a work. This activity then initiated the emergence of other crowdfunding sites such as Kickstarter which was involved in creative industry funding in 2009, and Gofundme which manages funding for various events and businesses in 2010.

Crowdfunding Benefits for Business

What are the benefits of crowdfunding for business owners? Apart from getting a business capital loan, it turns out that business owners will get a number of benefits from crowdfunding. The following are the benefits that business owners can get from crowdfunding:

1. Expanding reach

Crowdfunding activities make it easier for business owners to find investors who are interested in developing funds. In addition, crowdfunding can also facilitate interaction and various fundraising campaigns with one another.

2. Become an opportunity to introduce the business

The next benefit of crowdfunding is being able to introduce a business or fundraising campaign by providing information that highlights the business being started. For example, attractiveness, offer, target market to the value of the company.

This is intended so that potential investors can find out more about the business and the business and the steps of its development.

3. Running marketing

Business owners can do marketing from fundraising through various channels, such as social media, email, to other marketing strategies. This is useful so that fundraising can be done more quickly

Types of Crowdfunding

Crowdfunding is divided into four types, namely Donation Based, Reward Based, Debt Based, and Equity Based. In full, see the differences between the following four types of crowdfunding:

1. Donation Based

As the name implies, this type of crowdfunding collects funds using a donation system. Donors who deposit funds or capital will not receive anything in return from the proposed project. This type of crowdfunding is intended for non-profit projects such as the construction of orphanages, schools, and others.

2. Reward Based

In this type of crowdfunding, business owners will offer gifts or other rewards such as goods, services, or rights to donors. This type of crowdfunding is usually reserved for projects from the creative industry such as games, where donors who fund the project will be provided with interesting features from games.

3. Debt Based

Debt Based is the same as an ordinary loan. Prospective debtors will submit proposals and donors or creditors will provide capital which is considered a loan with returns in the form of interest.

4. Equity Based

This type of crowdfunding is similar in concept to stocks. Where business owners offer company shares with a target amount of funds within a specified time. Later, investors can buy company shares on the platform used. Equity Based is most suitable for startups and medium-sized businesses that require large capital.

That's information about crowdfunding and its types. Crowdfunding is often used as an alternative source of funding by startup companies and MSMEs who wish to develop their businesses.