Any business, no matter how small, needs capital to grow. However, financing is not easy to obtain. Many Malaysian SMEs rely on bank funds to gain capital, but there is a better choice: crowdfunding. Crowdfunding is a financial solution that is especially suitable for new and small businesses. The financing model gains capital faster and more easily compared to traditional products. So what is crowdfunding?
What is Crowdfunding?
If you have an early-stage business, then crowdfunding can the best choice for you to gain capital. Crowdfunding is a method of raising finances to support a project or even a company from the people around you.
This is how it works. The company or the person who needs funding will offer his project to be financed by a group of investors. The party who needs funding will set his financial target, as needed by his project or company. Investors will back the project with their money and in return, they will be rewarded in a variety of forms – depending on the crowdfunding category. They can be rewarded with gifts, equity, or repayment plus interest in accordance with what has been agreed between both parties.
Main Categories of Crowdfunding
Crowdfunding has several categories. Here are the four main choices one should know about before investing or utilizing the model:
Rewards-based crowdfunding – Here, investors will contribute their money to a crowdfunding project in exchange for an offered reward. If the the project achieves its financial target, or if the project succeeds, then investors can claim their reward. Often, but not always, the promised reward is an item resulting from the project.
Donation-based crowdfunding – In this crowdfunding model, investors are known as donors. Typically, it gains money for a non-profit project or cause, like building schools in developing countries or donations for someone who needs to pay medical bills.
Equity crowdfunding – An early-stage business will issue this crowdfunding model when it needs capital. After the investors finance the company, they will not be rewarded with physical gifts. Instead, they will get a small piece of equity in the company itself.
Peer-to-peer financing – This is the crowdfunding model most suitable for SMEs and comparable businesses. An SME (which is also known as an issuer, given that the SME issues a debt security) who needs capital will request funds from a peer-to-peer (P2P) financing platform. If approved by the P2P platform, investors will crowdfund the SME’s needed financing and the P2P platform, as a go-between, will facilitate the crowdfunding process. The SME uses the funds to grow its business, while investors get repaid with interest over time. Because P2P financing is online-based, the process from application to disbursement tends to be simple and quick – an advantage for SMEs as they often need capital fast.
Crowdfunding can be a big opportunity for your business, as it offers a faster, easier process for financing. Just pick a category that suits your needs most. Good luck!