Sunday, July 22, 2012

Crowdfunding as an Alternative Funding Source

Most business owners today all face the problem of securing business finance.  Almost any entrepreneur with a business plan who have done their research know about the pros and cons of venture capitalists and angel investors.  But these two sources of funds are not the solution for most people.  They typically require you to show you have a proven track record of success in your field and have already established a back of target customers to draw from.  What happens if you don't meet these requirements?  How do you fund your project?

Standard Funding Sources

Very few project are able to be funded by venture capitalists and angel investors as start-up companies.  Because of this what normally happens is the entrepreneur will put together a list of his friends and family and ask them for “donations” to the project.  They will spread the word to their friends and business networks and help to get the project off the ground.  But normally the person starting the project is putting in the overwhelming majority of his/her own money to keep the project alive.  They will take out loans, mortgage their homes, max out their credit cards or do anything they can to get the cash they need to keep the project running.

As if it wasn't hard enough to get funding for a start-up businesses project, the recent downturn in the economy and the financial markets have made banks even more cautious when lending money.  If you do not have an established reputation with your bank or lender then there is almost no way they are now going to take a chance on you or your project.

However there is still hope.  History has shown us that when certain avenues of finance are closed, new ones inevitably open up. This is the case with Crowdfunding in it's various incarnations.  It has become an alternative funding source for many eager entrepreneurs to get their project on solid financial ground.

The Alternative Funding Sources

Many new, alternative ways of raising capital have emerged that are able to help people looking for financial backing find the people who have the money to do so.  Some of the more common types of alternative financing are Microfinance, Peer-to-Peer Lending, Crowdfunding and Social Media.


Microfinance was brought about by Nobel Prize winner and founder of the Grameen Bank, Mohammed Yunus.  Microfinancing is a type of banking service that is provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services. Many of these microfinancing companies have focused their resources in third world countries.


This finance model involves getting people to fund your project through websites designed to attract philanthropic investors.  This concept has worked particularly well for musicians and for the theater groups looking to get their plays off the ground.  If you have a musical or theatrical project and need funding to make it a reality then crowdfunding allows you to reach the masses and people who support your project can donate to your cause.

Peer-to-Peer Lending:

Peer to Peer lending occurs directly between individuals or "peers" without the intermediation of a traditional financial institution. Peer-to-Peer lending (also known as person-to-person lending) is for the most part a for-profit activity.  This distinguishes it from charities, philanthropy and crowdfunding which also create connections between donors and recipients of donations but are nonprofit movements.  There are some established Peer-to-Peer websites available such as Prosper and Lending Club.  However this option may not be available to everyone since you still need to meet certain minimum finance and credit requirements. However it is still not as difficult as getting a loan from a traditional bank.  The standards are much easier to meet.


Post a Comment

<< Home