- It is a mechanism towards democratizing financing options for entrepreneurs
- It enables feedback on the idea or project before launching it
- It minimizes risk. If the project does not succeed only time is lost but not money
Crowdfunding is a collective financing tool available to SMEs for creating new ventures or expanding the business.
The Multilateral Investment Fund explains that crowdfunding “refers to any form of capital in which the financial needs of an organization or an individual are communicated to a large group of people.” Crowdfunding platforms are typically online portals where prospective lenders evaluate the merits of the entrepreneur’s needs and the purpose of the funds, among other factors, in order to contribute to the project’s development.
Lancetalent reveals that the first collective financing platforms appeared in the United States in 2009. Due to the success of this innovative feature, several sites are now available in Latin America- and the rest of the world – for entrepreneurs.
Ámbito Financiero explains that this financing mechanism is based on small monetary contributions made by a sometimes anonymous community that operates based on the interest of the project’s successful completion rather than on its prospective profit. However, compensation is typically offered in other special ways such as through invitations to participate in the development of the project or in exchange for advertising space.
In the first place, crowdfunding is a mechanism towards democratizing financing options for entrepreneurs. Any entrepreneur with Internet access can put forward a proposal in one of the several crowdfunding platforms without having to submit credit history or other formalities that are typically required by traditional financial institutions.
Likewise, the majority of crowdfunding initiatives are not presented as loans (although this possibility exists) and therefore it is not necessary to incur debt. For businessmen, crowdfunding avoids having to pay interest or returning the money. They simply receive financing from people that believe in the project, whom in turn receive (a generally non-monetary) compensation of some sort.
Lancetalent also mentions that this financing mechanism enables feedback and serves to measure the acceptance of the product or service. For instance, in order for a crowdfunding campaign to be successful the project needs to be well-received by the public: if an entrepreneur seeks financing to develop a mobile app and barely obtains any money, this is probably a sure sign that the market does not find the concept attractive.
Another advantage is that it minimizes risk. If for any reason the project does not succeed, the only thing lost is the time invested (and not money). Finally, funders are the project’s best promoters and wardens. The higher the support from the crowd that is economically funding the project, the more dissemination and backing of the initiative. It is important for financiers to consider the project as it were their own.
The success of crowdfunding has extended globally and regionally. The internet portal Crowdacy offers a list of the main crowdfunding platforms in Latin America and the Caribbean. It also offers a compilation of platforms in Spain and the rest of the world that are constantly being updated.
If you wonder whether your project or enterprise is suitable for crowdfunding, Ámbito Financiero points out the following features to keep in mind:
If your enterprise, idea or project has most of the features mentioned above, obtaining financial resources through crowdfunding might be a good option.
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