The name suggests that crowdfunding involves the process of raising small amounts of money from many people to fund the start-up. Traditionally, money is collected from friends, relatives as well as venture capitalists. But, recent advances in crowdfunding have given entrepreneurs the opportunity to reach out beyond their circle of friends and solicit money from the public.

Crowdfunding has developed in the contemporary world due to the concept of microlending practices. Microlending was initially introduced in the year 1700 by Jonathan Swift in rural Ireland through the Irish Loan Fund, where poor families received small-term loans without credit background. Recently the late it was discovered that Dr. Muhammad Yunus who is often called the pioneer in micro-financing, established an initiative in 1976 in which the poor of Bangladesh were provided with banks with the intention to promote social progress within the region. This was instrumental in the manner that microcredit was used in other emerging regions. Over the last 10 years.

How does Crowdfunding work?

Let’s suppose you have an idea for a business that you’d like to raise funds for so you’ve decided to go with crowdfunding. This is the process:

● You can start funds for a campaign using Vairt

● Input all details of your project (including the costs) and the reasons why people should be investing in your concept. Simply put, you need to write a business plan.

● Connect with millions of people online via social networks.

● The people who decide to associate with the concept, begin to fund.

● After the threshold is reached, the funds are paid out.

Crowdfunding is broadly classified into the following three kinds:

1. Rewards crowdfunding where investors get certain benefits or rewards for the contributions they contributed. For e.g. an author may offer a complimentary publication to all people who contribute at the minimum of $20.
2. Credit Crowdfunding in which the investment designed to earn the funds back by paying interest. Peer to peer lending platforms are an example of Crowdfunding.
3. Equity Crowdfunding the Crowdfunding investment is done in exchange for equity in the business.

Crowdfunding Investment

Let’s suppose that a business is in need of funds to purchase additional equipment to run their manufacturing facility. Typically, they approach the bank for a loan or even launch an IPO with shares. Through Crowdfunding, they may also consider funding their requirements by using crowd-funders. On the other hand, imagine someone who needs a loan to purchase the house. Due to a variety of reasons (other than a poor credit score) it is difficult to secure a loan through the bank. You can contact an online Crowdfunding platform and ask the possibility of paying interest on the amount he has funded.

In both cases investors have the option to invest in the company or individual with the intention of gaining a financial gain. Simply put you can make a Crowdfunding investment. It is vital to know that Investing in Crowdfunding is risky, and due diligence is required for those who are considering these platforms as a way to invest. It is always possible to start with a small amount of money and then diversify it among several fund providers to protect yourself from the risk of a default.

Let’s look at an example:

Ten companies are seeking $200,000 to launch the creation of a new business as equity. You are impressed by the business concepts of all these businesses. Additionally, 10 people are looking for $25,000 to pay for their weddings as a reward for interest on the amount. Being a good person, you’ll want to pay for the wedding of them all.

Let’s say you have $10,000 in your account to invest. If you loan the entire amount to them, you risk the possibility of not receiving the returns you expected from your investment. Even more, you run the risk of loss of capital is also a possibility! If you divide your money into 20 pieces that each cost $500 and fund all twenty of them your risk exposure is split by 20. Also, it is Crowdfunding! When more people begin funding, all these people will have the money they need with minimal risk for all investors. It’s a win-win situation for everyone.

A few helpful suggestions:

● If you are an investor on Crowdfunding platforms will enjoy the benefits as well as the dangers. Here are some suggestions to get you to where you want to be:

● It is important to clearly define your investment goals as well as your risk tolerance and time horizon for investment. Then formulate an investment strategy.

● Stay true to the method and stick to the plan at all. Do not fall for the next shiny thing on the market!

● It is important to know the Crowdfunding ecosystem thoroughly prior to investing.

● Do not get too excited about the success stories. It’s an investment, not a bet!

● Review the proposal of the fund seeker carefully before making a decision on whether to invest. If you’re unsure you are unsure, ask questions — don’t presume.

● Do your Math thoroughly. Include all expenses before you calculate returns.

● Diversify to limit the risk of capital

Select the right Real Estate Crowdfunding platform carefully. Choose one that screens applicants for funding prior to uploading them on the website.