When regular forms of financing do not offer a solution, crowdfunding can be the outcome. Crowdfunding is an alternative way of financing over traditional forms of financing, such as borrowing from a bank. The principle of crowdfunding is fairly simple. By starting a (online) project you can use crowdfunding to try and attract investors in your project or company, in exchange for, for example, a repayment of the investment with a certain interest rate.
Crowdfunding has several advantages over traditional financing. In addition to raising (starting) capital for your project or company, you can work directly on raising awareness of your financing objective and creating involvement with a large group of people. In addition, crowdfunding is particularly interesting for starting entrepreneurs because it is often difficult for this group to raise financing via the regular channels.
On the other hand, crowdfunding is also extremely suitable for achieving attractive financial returns. To invest in a project or enterprise, there is not necessarily a business reason to be. For example, business investors can invest through crowdfunding as an alternative form of investing. However, with almost all platforms it is also possible to involve yourself as a private investor in a project, for example as an alternative to saving.
Crowdfunding differs from traditional financing in a number of respects. To begin with, entrepreneurs themselves have much more freedom in determining the conditions that apply to investors. Consider, for example, the duration, but also the interest rate. In the case of crowdfunding, there is also a great deal of responsibility on the part of the entrepreneur / borrower to ensure that the target amount is collected. This is possible, for example, by making promotional films. Many online platforms offer entrepreneurs their own project page to promote their project and thereby raise sufficient capital.
Of course, there are also risks attached to crowdfunding, just as this is the case with traditional financing such as borrowing from a bank. For this reason, always check that platforms that you want to work with are in possession of the correct exemptions or permits. Want to know more about this? Then visit the AFM website via this link.
Broadly speaking, crowdfunding can be divided into three different categories.
With crowdfunding in the form of donations, there is no consideration for an investment. Investing in projects of this nature therefore do not provide (financial) returns for investors, but they are an extremely suitable way for individuals or companies to start a fundraising campaign for a good cause.
With this second form of crowdfunding, investors receive a non-financial compensation. This form of crowdfunding is used relatively often in the development of products or in setting up projects in the cultural sector. Consider, for example, an investment in the development of a product in which the product is supplied “free” to the investor.
Loan / equity
Probably the most popular form of crowdfunding is where a consideration is provided to investors through a financial compensation. The most common form of financial compensation is repayment in combination with interest on the amount made available by an investor through financing.
When looking for financing, it can be difficult to determine which platform suits you best. Below are some tips to help you choose the right platform.
Which form of crowdfunding do you want to use?
Start by determining the type of crowdfunding that you want to use (see above for an explanation of the different types of crowdfunding). For example, do you want to focus on the development of a product? Then it can be interesting to offer a counter-payment in the form of a payment in kind. As a starting entrepreneur, for example, it may be interesting to raise financing via shares or convertible loans.
Facilities of the platform
Another important point to consider when choosing a platform are the facilities that a platform offers. These can be very simple things. For example, investors can easily transfer money. These are things that often seem obvious, but can be incredibly important for the success of your project.
Looking for financing, or also creating brand awareness?
When setting up a campaign, it is important to ask yourself whether you want to have a stage in addition to seeking financing to promote your product / service. For the local entrepreneur who is looking for financing to expand his store, an (inter) national platform may offer little added value. When developing an online service that focuses on the international market, it might be very pleasant to work on name recognition in this way.
Finally: does it suit your feeling?
Of course it is also very important to go by your feeling when choosing a platform. Pay attention to the preliminary process, but also the provision of information on the website and service from the platform. With this kind of business it is very important to feel comfortable in all aspects.
Crowdfunding platforms often use different guidelines when the target amount for a campaign is not fully achieved. In some cases, the period in which the financing amount had to be extended can be extended once. In many cases, the project ends when no successful funding has been obtained. Please note that costs must often be paid before the start of a project.
Crowdfunding platforms can charge different costs when starting a project. Below is an overview of the most common costs:
- Analysis costs: this is often charged in advance to determine whether the project is sufficiently creditworthy.
- Legal costs: these are costs that often arise due to the drafting of contracts at the start of a project
Publication costs: costs related to the placement of a project on the website of a platform.
- Management fee: often a monthly cost item that must be paid during the entire term of the financing over the (still) outstanding amount.
- Success fee: often a one-off cost item of a certain percentage over the collected funding amount.
When selecting a platform, always pay attention to the points above to avoid unpleasant financial surprises.
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