Crowdfunding is a finance technique operating by platforms on Internet to match investors and borrowers for projects of common interest. It is used mainly to finance specific projects/ideas (as opposed to firms), and its apparent simplicity draws attention. Crowdfunding allows investors to finance projects of interest that do not, necessarily imply a monetary return. On the other hand, it enables entrepreneurs to find non-bank finance opportunities.
One of the main drivers of crowdfunding is an emotional engagement with the idea that might be related to local needs, private preferences or brand values that are attached to the project. This can be understood as this type of fund was first created to help philanthropic activities. In this online platform potential entrepreneur upload information regarding their project activities and objectives, in some cases in the form of a business plan, and requesting funding under specific terms and conditions.
One remarkable aspect is that entrepreneur does not need an intermediary (e.g. a banking institution), to seek funding and can source directly the savings of a large audience.
For lenders they can contribute in two ways: on one hand, they give small donation, without financial consideration and sometimes in exchange for a non-financial but tangible compensation (e.g. a free ticket to a show, a pre-order of a product). On the other hand, by financial contribution and here they expect some financial return. It comprises lending-based crowdfunding and equity-based crowdfunding (i.e. crowd-investing). In this sense, there is an obligation for the borrower to repay the money to the investor, often with a fixed interest rate.
How does Crowdfunding works? It connects investors and borrowers through an online platform, which can be national or international. Sometime the platform conducts a pre-screening of the viability of the idea. So you must prepare your business plan and your brand love message and once the proposal is accepted, the borrower prepares a budget proposal with the required amount needed to accomplish the project, and a timeline. The project owners use social networks to attract lenders/investors, and the platform itself might also publicise the project. If the project is funded, then borrowers use the platform to keep lenders/investors updated.
Remember the main benefit of crowdfunding is providing finance to innovative projects, new or existing firms also the lower interest rates charged by Crowdfunding platforms compare to traditional finance.