What is Crowdfunding?
Crowdfunding is the alternative lending method of raising capital through a large number of individuals, usually via an online platform. Originally, crowdfunding started with the idea of encouraging entrepreneurship by pairing retail investors with entrepreneurs who had a good business idea.
For entrepreneurs, crowdfunding enables you to spread awareness of your business venture and raise funds at the same time.
For investors, it allows you to participate in new business ventures, and at the same time, receive returns in the form of money or gifts.
Being a combination of crowdsourcing and micro financing, crowdfunding in Singapore is a great alternative to the traditional approach of obtaining financing through business loans from a bank. It allows for more flexibility, and the opportunity to reach out to a greater audience.
Benefits of Crowdfunding
As a relatively new concept that only emerged in recent years, it is understandable that many people are still unaware or entirely averse to the idea of raising capital by pooling from a large group of individuals.
While crowdfunding as an alternative lending method in Singapore has not yet been able to disrupt traditional banking in any significant way, it has provided many businesses with greater access to working capital.
Here are a few benefits of crowdfunding that can make it a better option than a traditional bank loan:
- Greater flexibility to structure a loan that is specifically tailored to the needs of your business.
- Faster and smoother process.
- Able to market and spread awareness of your business to participating individuals.
Types of Crowdfunding
Just as there are many types of SME loans for different businesses in different industries, there is also a variety of crowdfunding types to cater to these differences.
The type that you choose will depend on the nature of your business or project and the goal that you want to achieve.
Crowdfunding is generally categorized into 4 distinct types.
- Donation Crowdfunding – where the general public pool together to raise funds for a person/cause/organisation in need.
- Reward Crowdfunding – where investors give to a project or cause, and receives a small gift or token.
- Debt Crowdfunding – more commonly known as peer-to-peer lending in Singapore (P2P lending), where retail investors lend money to a business, in return for interest rate earnings of up to 18% p.a.
- Equity Crowdfunding – where retail investors purchase the shares of a company in return for profits in the form of dividends or distribution.
It is important to know that all online platforms that deal with unsecured lending in Singapore must obtain the CMS license issued by the Monetary Authority of Singapore (MAS).
In recent years, more and more startups have turned to equity-based crowdfunding in Singapore to raise capital. Investing in a startup through crowdfunding has also become quite popular amongst the retail public.
More than just enabling budding entrepreneurs to raise money to start their business, investors also get the chance to own equity in innovative start up ventures.
These small investments have limited downside and a potentially unlimited upside in the event that the business becomes successful.
However, it is always good to be cautious. With all the good things that come with it, there is a fair amount risks that can come with crowdfunding, especially when it is debt-based.
If you are going to contribute, be prudent to carry out sufficient due diligence before on both the facilitating platform and the business that you are lending money to.
If you own a business that is seeking to raise capital, ensure that you only work with facilitating institutions that are governed by regulations and have proper licenses.
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Peer-to-peer Lending (P2P Lending)
P2P lending in Singapore enables companies to get access to funds outside of the traditional banking channels. Individuals who lend to these companies via P2P lending platforms are able to read up on information about the businesses and choose which business they want to lend to.
Unlike P2P lending, recipients of funds raised in a donation-based crowdfunding campaign do not have to repay back the money.
In most cases, campaigns that come under this category are usually initiatives to raise funds for a charity, disaster relief, non-profit organisation or people who are in need.
Made popular by platforms like Kickstarter and Indiegogo, individuals usually contribute small amounts of money to a project that they like, in return for a reward of some kind.
Most individuals who contribute in this category are not doing it because of the reward, but rather, they contribute because they genuinely like a project that they find to be innovative or fascinating and want to support it
With equity crowdfunding, contributors get to own shares in your company by trading it for capital. As equity shareholders, contributors will get returns in the form of dividends or profit distribution.
A true win-win situation as you get to raise money to start or expand your business, while investors get an opportunity to own equity in a company that they otherwise would not have had a chance to.
At the same time, the campaign also serves as a free marketing tool for you to advertise and spread awareness of your business.