crowdfunding

 

By now, many of you entrepreneurial-spirited individuals should have heard the term “crowd-funding”. In case you haven’t, crowd-funding is when a person relies on the funding or small financial investments of a large group of people – mainly obtained via the internet – to start up a new project or business venture. People choose this method of raising capital when it is difficult to secure funding on their own. Websites such as KickStarter, GoFundMe, and UpStart are just a few online platforms that are dedicated to crowd-funding.

 

According to Crowdfunding.com, the top ten sites on the web are as follows:

 

1. GoFundMe

2. KickStarter

3. IndieGoGo

4. YouCaring.com

5. Causes

6. GiveForward

7. FundRazr

8. FirstGiving

9. Fundly

10. CrowdRise

 

One thing to understand about crowd-funding, however, usually there are fees (processing rates) that are applied to all transactions made on your behalf. Not all of these sites cater to future business owners either. Some of them will allow anyone – who may need extra cash for a special project – to create a profile. But, for the future business owner, there is a gray area when going the crowd-funding route. It is knowing if your business will be successful or not. If your business becomes hugely successful, that’s great. If not, you may find yourself in debt having to pay your investors. Of course, the stipulations of your agreement with the investor(s) will vary.

 

Stephen Pym, of AskMen.com, suggests that entrepreneurs watch out for predatory investments before entering into any crowd-funding contract.

 

Crowd-funding allows an individual to enter an agreement with another individual or group of individuals (corporations might also be included soon) in which they can get money up front — providing them with the latitude to start their innovation, invention, creative piece, company, or whatever they choose. The lender shoulders the risk — in exchange for a cut of future earnings.

 

The major disadvantage to using this platform is that one can fall victim to predatory behavior, misunderstandings, potential lawsuits and other negativity. While the platform is new, a young, inexperienced graduate or postgraduate can enter into a deal where they could be paying up to 10% of their future earnings for 10 years or more.

 

This is the trick: It’s difficult to predict the future. If you make much more than you thought, then the deal was good for the lender. If you make less than you thought or have years of unemployment, then the deal was less good for the lender. But if you come up with an invention that makes millions, you may find yourself paying back vastly more money than you ever received. There are also no laws yet in place to protect the lender, or the lendee. The sites themselves assume no liability, even though they make a small percentage of the interest. Before you enter into such an agreement, make sure that you’re not replacing one crushing debt with the prospect of losing even more money down the road.

 

Read Pym’s full article HERE.

 

The key is to study the fine print. Make sure that the contract you are entering will be beneficial for you…short-term and long-term. Conduct research with other crowd-funding recipients and ask questions about their experiences. The more advice and understanding you have, the easier it will be in making the final decision to use this funding alternative.