Technological advancements in recent years has lead to a new way of people looking at finance. Individuals as part of the crowd are now able to push banks aside in order to get a better rate on there savings (or to borrow for cheaper). All this is due to the growing phenomenon of Crowdfunding.
Crowdfunding is where the crowd (people like you and I) lends money to people looking to jump start there business. In return of investing their money, the lenders receive rewards such as a fixed yearly rate on there money (interest) or a stake in the borrowers business. With so many different crowd funding websites out there, this article will aim to show you the different crowd funding models and give the websites that are best and most trusted for the type of model.
1) Lending based crowdfunding (Peer-to-peer lending) – This is by far the most common model and it is the platform that really set the crowd funding world alight. The lending based model was designed to bypass banks so that both investors(savers) and borrowers benefit by getting the best interest rate possible.
In this model, investors (savers) are pooled together based on their risk levels and lend money to an individual or business. The individual or business who received the money then pays interest on a monthly basis to the investors. Investors can get interest rates of between 4% – 7% which is far higher than those given by traditional banks. Websites like Funding Circle , Rate Setter and Zopa offer lending based crowd funding.
A new website, Fruitful has come up with a new model dubbed the “crowd-mortgage”. Fruitful raises money from the crowd (investors) and uses these funds to give out commercial mortgages. Investors saving there money with Fruitfull will get a 6% interest rate on the amount they have invested. Fruitful has also assured investors of the security of there funds as funds are secured against “mortar” so it is relatively safe way to invest your money.
2) Equity crowdfunding – This model is for people that want to buy a share in a business they are interested in.
There are 2 ways to ways you could invest money using equity crowd funding.
- Buy equity in a business – This is the traditional way of investing in companies if you would like to side step the stock market. Companies listed on websites like Seedrs and CrowdCube will put the amount they want to raise and what share of their business they would like to give up in return for that money. The businesses listed in this way are mostly startups and so although the potential for your money to grow may be high, there is also significant risk attached to it. Famous startups include Google, Facebook and Uber so if you pick a good business with potential, your wealth is set to sky rocket.
- Buy equity in a buy to let scheme – This is for anyone that wants to diversify there portfolio to include property. Websites like House Crowd and Property Moose advertise properties they think are good value for money. They then raise money from the crowd and buy the property under a special purpose vehicle (SPV). The SPV works as an individual company and thus even if the websites advertising the property go bankrupt for some reason, your investment in the house will be unharmed. You will receive yearly rent, in this case dividends and after a certain period, you will get the chance to vote if you would like to sell the house for a profit. Read my review of the House Crowd here.
3) Reward Based Crowdfunding – The reward based or donation based crowd funding model is for those who would like to give money to a worth cause without any financial incentive attached. People or charities looking to raise money for a good cause will usually use this type of crowd funding platform. Individuals and businesses also have used this platform to get there business idea off the ground. Instead of people lending or buying a stake in the company, investors are given rewards based on the money they put towards the cause. Apart from receiving rewards (such as a prototype product) , investors get the satisfaction of helping a good cause (charities).
Some reward based crowd funding websites include KickStarter and Crowd Funder.
4) Crowd sourcing work – In this crowdfunding model, people crowdsource their talent and time in order to gain financial rewards. Websites like Amazon Mechanical Turk , Elance and SkillPages are great for people looking to do work there are interested in whilst earning money (freelance work). With these websites you basically fill out your application form which includes the skills you have. People on the website will either contact you based on the skills you have to do some work for them for cash or you can apply to do work already advertised on the website. Elance is definitely my favorite as it has the most opportunities and a wider variety of work you can do!
This type of websites also works the other way round, i.e. if you have some work to do and you would like someone else to do it, you can post your task online and offer an amount you are wiling to pay for someone to complete your work.
Crowdfunding, in my opinion, is an area that is only set to grow. Fruitful, the “crowd mortgage” innovator raised £140,000 in just 2 days last year for an 8% stake in there company through CrowdCube. This just shows you the belief people have in this new way of financing and it goes to show the power of the crowd. With government looking to bring in peer-to-peer Nisas in 2015, income earned this way will be tax-free (till a certain limit) and this will only add to the rise of the crowd!