Crowdfunding: What Is It and How Does It Work?

Crowdfunding has become a favourable and feasible medium of fundraising, helping businesses to roll out and sustain their ventures in the competitive market. Moreover, it is an ideal way by which fundraisers collect considerable amounts from large groups of individuals. 

Generally, budding businesses or start-up companies consider this type of funding as a convenient means of accessing alternative funds and continuing with daily business activities without facing financial constraints. 

What is Crowdfunding?

In crowdfunding, several individuals come forward to donate smaller amounts towards meeting larger funding aims.

It is an effective way to raise money and gather the capital required to get a business off the ground. For businesses it is an ideal opportunity for entrepreneurs to source investors, helping them expand the horizon of their business. 

It involves a wide network of people, connecting them typically through the internet and gathering funds to back up new business projects or ideas. It helps businesses not only acquire funds but also grow their audience pool. 

How does Crowdfunding work?

Crowdfunding brings lucrative opportunities for entrepreneurs to raise substantial funds from anyone willing to invest. In addition, this practice of funding creates a forum for those who want to pitch ideas to waiting investors. Investors can choose from hundreds of options and invest a meagre amount. 

This type of funding leverages social networking sites to showcase its business needs and goals to potential investors and gather funds accordingly. Different crowdfunding platforms enable interactions between fundraisers and the crowd, helping businesses achieve their funding aim. 

Types of Crowdfunding

Here are the types of crowdfunding that business bodies can opt for to raise money and accelerate cash flow:

• Peer-to-peer Lending

In peer-to-peer lending, companies borrow money from large groups of people (crowd), promising them to repay the amount with interest. This type of funding is like traditional borrowing, except that the amount is borrowed from multiple investors.

• Rewards-based Crowdfunding

As the name suggests, in reward-based crowdfunding, a group of individuals contribute towards a project in return for receiving a non-financial reward like any services or goods. 

• Donation-based Crowdfunding

In donation-based crowdfunding, a large group of individuals contribute small portions towards materialising the funding aim of a charitable project. However, in this, investors do not receive any material or financial return.  

Another convenient way business bodies can streamline their crowdfunding platforms is by opening current accounts. With the RazorpayX-powered current account services, business bodies can replace tedious manual financial operations and save turnaround time. 

Advantages of Crowdfunding

Crowdfunding comes with the following lucrative advantages:

It helps small businesses resolve all payments and stay afloat even during the lean period. It also helps investors explore different business options. 

Risks of Crowdfunding

Both investors and business firms must be aware of the risks related to this type of funding. Albeit companies or firms can effectively raise funds via funding, they cannot dodge the risks associated with this financing method. For it to prove effective, business owners must invest in crowdfunding campaigns. 

In the case of Investors, indulging in it can rob them of their entire investment. Moreover, in case a startup fails to sustain itself, the investors will end up losing a lump sum amount. Hence, they must ensure that they are contributing to a credible company, thereby making an informed decision. 

Crowdfunding benefits for investors

Here are a few crowdfunding benefits for investors. Let’s have a look.

1. Access to Early Stage Deals: Crowdfunding offers investors the opportunity to invest in high–growth startups and businesses at an earlier stage of development than they would otherwise have access to. This can provide investors with greater potential returns, as well as the chance to be part of a project’s growth and success.

2. Diversification: With crowdfunding, investors can diversify their portfolios by investing in a variety of deals. This provides investors with the chance to spread their risk across multiple investments, thus reducing their overall exposure to any one deal.

3. Lower Investment Minimums: Crowdfunding platforms often offer lower investment minimums than traditional investment channels, allowing investors to access more deals with lower amounts of capital.

4. Lower Fees: Crowdfunding platforms often offer lower fees than traditional investment channels, allowing investors to keep more of their returns.

5. Increased Liquidity: Crowdfunding platforms often offer greater liquidity than traditional investment channels, allowing investors to exit their investments more quickly.

Examples of successful crowdfunding campaigns

Let’s have a look at successful crowdfunding campaigns.

1. Pebble Smartwatch – This campaign set the world record for the most money raised through crowdfunding, raising more than $10 million on Kickstarter.

2. Exploding Kittens – This card game raised over $8.7 million on Kickstarter, becoming the most–funded game in the website‘s history.

3. Coolest Cooler – This cooler with a built–in blender, Bluetooth speaker, USB charger and a cutting board raised over $13 million on Kickstarter.

4. Reading Rainbow – This educational children‘s show raised more than $5 million on Kickstarter, making it the most funded educational project in the website‘s history.

5. OUYA – This video game console raised over $8.6 million on Kickstarter and became the third most-funded project in the website‘s history.

How RazorpayX Helps Start-up Companies?

Besides opting for crowdfunding, budding businesses can unlock multiple benefits that banking solution providers like RazorpayX extend to their customers. They help businesses manage their growth and sustain themselves in an ambiguous global scenario.

Budding business enterprises can opt for RazorpayX for the following reasons:

• One-stop banking solutions platforms like RazorpayX allows business owners to open current accounts, pay taxes, schedule payments, pay vendors seamlessly and check invoices from a single dashboard. This saves valuable time and effort. 
• It is an accounting and banking platform that fills the gap between advanced banking solutions and finance professionals. It allows easy accounting software integration.
• With RazorpayX Payroll, businesses can automate salary payments and provide insurance policies to their employees.

This type of funding is a debt-free way for entrepreneurs or startup companies to raise funds and expedite the cash flow beyond the conventional method of doing so. The one-stop banking solutions platform RazorpayX helps business bodies in manifold ways, which include paying taxes, checking invoices, opening current accounts etc.

Frequently Asked Questions