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What is crowdfunding and how does it work?



Today, starting a company, starting a business or carrying out any project is significantly more complicated than it was a couple of decades ago, especially when it comes to financing. In general, competition is more complex and access to credit is more limited. However, at present, SMEs and freelancers have more tools to obtain alternative financing, all of them very helpful so that entrepreneurs can take their first steps. And among them is crowdfunding.

What is crowdfunding? Definition and Meaning

What is crowdfunding? Definition and Meaning

When a person wants to start a project, launch an idea or create a company, they need a minimum amount of money, which requires them to go to loans and credits – institutional and non-institutional – to obtain the amount needed to start or To keep growing However, once again, technology has become an important ally for entrepreneurs, as the internet offers the possibility of asking for donations or loans to cover the goal.

Crowdfunding, as a financing tool, offers the entrepreneur the ability to explain his project and share his idea, so that people who are part of a community offer him the financial help he needs.

Therefore, crowdfunding is a form of collective financing very useful for both young people and adults, because there is no limitation in terms of the subject or objective, and can be used for business, artistic, political or even projects humanitarian

Crowdfunding had its beginnings in Spain at the end of the 80s, in 1989, when the Extremoduro group managed to record an album thanks to donations made by private investors. However, it is in 1997 the date used to explain what crowdfunding is, because a renowned music group called Marillon was able to finance a tour of the United States thanks to the help of its fans.

How does crowdfunding work?

How does crowdfunding work?

Starting a crowdfunding project is significantly simple. All that is needed is to belong to a community with this nature and, of course, to have an interesting and structured project that invites people to participate in it. These projects must be presented to these communities, known as crowdfunding platforms – in this other article you can learn about some of the best crowdfunding platforms in Spain. The process divides into three steps:

  1. Shipment and exchange of the project. This focuses on the entrepreneur, who has the obligation to present the project he has created to the platform or to the community of which he is a part. For this, it must be fully explained, from the end to its objectives, in addition to detailing the amount of money needed, the use that will be given and the type of crowdfunding; This gives value and security to the donor.
  2. Evaluation and submission of the project. A fundamental part of how crowdfunding works is the evaluation of the platform on which the project will be offered, since it will study all relevant aspects and assess it before publishing it. This evaluation will affect the decision making process of the potential taxpayer.
  3. Donation and closing. When the project is published after its valuation, a time limit or a deadline for obtaining the necessary money is placed, whether or not the goal has been achieved.

What are the models or types of crowdfunding

What are the models or types of crowdfunding

There are 5 main types of crowdfunding. All offer different benefits and specifications that are considered important and decisive for the taxpayer.

  • Donations No reward is offered to taxpayers.
  • With rewards. There will be a reward after the contribution.
  • With Actions. A percentage of participation in the project to be created is offered.
  • Crowdlending These are loans between individuals, that is, the money will be returned with an interest – read more about what crowdlending is.
  • Royalties This is considered an investment, which will generate future benefits.