From the perspective of the investors, the concept of crowdfunding can provide an alternative route to potentially building a portfolio and adding to wealth when considering future investments. It allows individuals to invest small amounts of their money across multiple ventures, rather than investing a lot of capital in only one.
With this method, investors can potentially diversify their portfolios quickly and more efficiently, whilst also possibly improving their chances of getting a competitive rate of return on said investments. Capital that is diversified across multiple investments could reduce the likelihood of losing all the capital as opposed to committing all of one’s capital into one investment.
Before going into this article, this should not be considered as financial advice, but simply an exploratory piece surrounding both the benefits and risks that comes with investing money into crowdfunding projects.
What is Crowdfunding?
Previously, if an individual wanted to fund a project by investment, such as a property development, product or business, they would need a large amount of capital to be able to do this.
‘Capital’ is used to describe any form of personal wealth, including disposable income, inheritance or other assets a person may own. Without capital, those looking for investment into their business, project or products would have to find another way to raise the money in order to get their project off the ground.
There are a few ways to do this, for example securing a loan. By securing a loan, they would be able to use the borrowed money to invest in their project. Whilst this might sound like a good idea, taking out a loan can be seen as risky to some due to the requirement to maintain consistent payment and the possibility of a high rate of interest. This means the accrual of debt to pay back the loan itself, but also, typically loans come with an interest rate, which means owing even more money than they have been lent. Failure to maintain a consistent payment plan can also affect the credibility of the individual and business and make future investment almost impossible.
On top of this option, there are more personal ways to gain capital, such as asking family and friends or courting a private investor. This option is not available for many and can sometimes add up to a rather awkward and fractious situation.
‘Crowdfunding’ is another route that is becoming increasingly popular. In the late 2000s the idea of crowdfunding became a more viable alternative to many. The concept of obtaining funding from a large group of people provides crowd validation, investor confidence, potentially faster funding and a chance to build relationships and a community with the same vision.
To crowdfund for a project, product or business, means to raise the funding required by the Fundraiser from a number of people. Typically, a group of investors pull together (despite not actually knowing each other) and make individual contributions of variable size to provide the overall capital necessary to get a company or project completed.
As an individual’s investment can range from small to large, this also makes investments available to people who had previously had no inroads to explore the potential wealth an investment into a project or business might bring.
The idea of crowdfunding has aided in many charities, businesses and individual projects getting off the ground. For this reason, this has become increasingly popular with Governments and those who are looking to build their portfolios with minimal wealth. When people do this, they aren’t only putting their money into a project they believe in, they may also potentially be investing in the future. This means that if the business or project is successful and/or the business continues to expand this will potentially yield great returns on their investment later down the line.
Four Different Types of Crowdfunding
Now we’ve established what crowdfunding is, it’s important to understand the four different types.
Firstly, there is Donation based crowdfunding. This category of crowdfunding is when individuals donate small amounts of capital to meet a larger funding aim. This is typically for a specific charitable purpose or project with the understanding that the donors will not receive any financial or material return, but have the satisfaction of investing in a philanthropic venture.
The second form of crowdfunding is Debt, or Loan, crowdfunding, which also incorporates Peer-to-Peer Lending, and involves a pool of investors who lend money towards a project or to a company. In exchange, they will receive a debt instrument that will pay a fixed amount of returns and interest until the loan is paid back.
The third form of crowdfunding is Reward crowdfunding, which consists of individuals donating to a project with the expectation that they will be rewarded in a non-financial way. For example, getting the use of a service or even exclusive or prototype versions of goods earlier than the market.
Here at LEOcrowdfunding, we focus on the fourth form of crowdfunding; Equity Crowdfunding. This refers to when individuals have the opportunity to invest in a business or project in return for equity, meaning they have invested in a viable asset and are actively involved in the investment process as passive shareholders. A passive shareholder provides the equity investment required to help fund a property project, whilst the fundraiser takes care of the day-to-day business related to the property and crowd investors then receive updates on the project.
We specifically deal with Property Equity Crowdfunding. The advantage of investment in this manner means that investors have the potential to start their property investment journey in development projects without necessarily having the full capital to purchase a property themselves outright. Typically, the rate of return is higher with Equity than Debt Crowdfunding, as the risks are higher. A debt instrument will usually be first in the queue for payback for a lower rate of return. Please note that when investing in the opportunities available on the LEOcrowdfunding platform, your capital is at risk and returns are not guaranteed. Please refer to our full Risk Warning for further details: https://www.leocrwodfunding.com/risk.
If you want to further understand how crowdfunding works, feel free to contact one of our team through the contact form on our website. Whilst we do not offer any financial advice or assistance, we talk you through how you can use our website to find out more information surrounding our live crowdfunding projects.
- The 6 Steps to Raising Funding Legally
- 5 Considerations When Potentially Building Wealth
- Investing as a Student: Crowdfunding Edition
- How Has Crowdfunding Changed the Investing Landscape?
- How You Could Potentially Retire Comfortably Through Equity Investment
- Can You Invest in Property With Under £5,000?
- 5 Reasons To Consider Investing With LEOcrowdfunding
- An Introduction to Equity Investment
- What is Crowdfunding and How Does It Work?
- How To Begin Investing With LEOcrowdfunding
- CROWDFUNDING - The Alternative Finance Revolution
- 2021 – THE YEAR OF EQUITY CROWDFUNDING
- Tribe Building For Developers
- Time Poor, Cash Rich?