by Sarah Cagle

Created on: January 13, 2013   Last Updated: January 15, 2013

Crowdfunding can be a great way for a new business or charity to get the starting funds or capital it needs to get off the ground or start a new project.  For many people, however, crowdfunding is such a new concept that they don’t understand how it works or its advantages.

Simply put, crowdfunding is a way to get a small amount of starting capital from a lot of different investors. These contributions or investments can be as small as five dollars or even less. It is very rare to have contributions above $100 for a crowdfunded project. When added together, these small amounts can form a large enough pool of money to allow a charity or business to get started or expand.

The main advantage of crowdfunding is that is allows a group of people with an idea to sell it to a large group of people rather than hunt for a few investors who will put up large amounts of money. To start, a potential business owner or owners can write a business proposal or charity plan that they then post on the Internet. While it is possible to do this by setting up a website dedicated only to funding the project, there are also several different websites that specialize in crowdfunding. These sites allow large groups of potential investors to read through the various business proposals, then contribute money to the projects that they are interested in.

Depending on the set-up described by the business or charity, investors could make a one-time donation or they could make an investment in a business. This means that they expect to receive a return from the money that they contribute.  In the case of making an investment, the business owner or owners should post status updates on the state of the business. Eventually, it should report some profits.

Because crowdfunding websites reach such a large number of potential investors, it’s possible to fund a charity or business even if the owner or owners have been unable to qualify for traditional financing. Usually, businesses or charities tend to do this by telling people how their idea will benefit the community. This is especially important if the business or charity is asking for a donation. Creating jobs, providing a needed service, and offering a new product are common ways to encourage potential investors to donate to or invest in a charity or business.

Additionally, potential business owners or charity founders can offer free product samples or discounts on future products to donors. This gives the business the opportunity to get the starting capital they need but it can also generate excitement about the new charity or business.

Learn more about this author, Sarah Cagle.
Click here to send this author comments or questions.