Whilst crowdfunding may seem like a simple way to fund your idea, you still need to know the difference between the two kinds of crowdfunding, the pros and cons of each, and the fees associated with each.
If you’ve ever had an idea for a project or something you think would be revolutionary, but you can’t raise the money yourself, you have many options. In the old days, you would go to the bank and ask for a loan, or find an independent investor to help you.
Usually these would require documents or some kind of proof that your product or idea was worth their investment. Nowadays, especially with the internet and the access to billions of people it offers, it’s easier than ever to find a large number of people to help you out.
This is what crowdfunding is all about. It allows you to get a little money, say fifty to a hundred dollars, from two hundred people each. This could add up to as much as $20,000 or more. This is now an realistic option for millions of people.
Now let’s talk about the different types of crowdfunding fees.
Types of Crowdfunding Fees
- All or Nothing: This option allows you to collect money from people who like your product or idea. With this method of crowdfunding, you determine how much money you need to collect at the beginning of your “campaign”. At the end of the fundraising period you specify, if you have not reached the amount you thought was necessary, all the pledged money is automatically returned to the donors.The good thing about this option is that it gives your project an exciting feel. By making your contributors feel like they’re giving to a project with a definite goal, they feel like they have a stake in what they’re investing in. If a potential supporter sees that you have a sound idea and plan, they may give you a bigger pledge because then they feel like they’ve provided you with most of your money and that they’re a key part of your future success. However, if you don’t reach your full fundraising goal, you might get no money at all.
- Keep It All: With this method of crowdfunding there’s no need to set a final fundraising goal. At the end of your collection period, you keep whatever amount has been pledged – that is, minus the fees, or commission, which we’ll discuss later. If the entrepreneur doesn’t think the amount they have raised is enough, they can choose to refund the money to everyone who contributed.
With this option, if you end up short of your goal, you’ll still have some money to help you to your final goal. However, you could end up not having enough money for your project, which could cause problems. You might have to come up with the rest of the money yourself or return all the money. And the people who are promised something may not end up getting it if the reward was contingent on you reaching your goal. (Because at the end of your time period you might not have reached your funding goal.)
Now we get to the part that people are most concerned with. Like a bank, which will charge you interest on a loan, you are charged a fee based on the amount of money you collect. Unlike with a banks, this money is taken out at one time, and not during a specific time period. All sites are different, but they follow general rules. Fees will depend on the type of crowdfunding you choose and on whether you meet your goal or not. Below is a list of some popular crowdfunding websites, along with their fees.
- Gofundme: Gofundme is one of the most popular, if not the most popular crowdfunding website out there. They have helped to raise money for millions of people. Gofundme takes 5% out of every person’s contribution and a processing fee of 3%. So you get 92% of each contribution you receive.
- Kickstarter: Kickstarter is another popular crowdfunding site. They apply a fee of between 3% and 5% to all transactions.
- indiegogo: indiegogo is a crowdfunding site that allows people from all over the world to contribute money to a project. It is a very popular crowdfunding website internationally. They have two fees. The first is a platform fee of 5%, and the second is a third-party credit card fee of 3%, plus thirty cents per transaction.
Be aware of any crowdfunding website that states or claims in any way, shape or form that they are 100% free. They could be charging your contributors as much as fifteen percent, and you will likely have to pay a 3% processing fee.
Crowdfunding is a new and popular way to raise money for a project that banks may be unwilling to lend you money for. Millions of people have had an idea and found help from supportive peers around the world.
Crowdfunding has become popular because it allows everyone to contribute to projects created by people just like themselves. They get to see themselves as a part of something bigger that matters.
At the same time, you, as an entrepreneur who really believes in your work, can get help and feel satisfied that others believe in you. There are things you need to figure out – such as what kind of reward you will offer your contributors, and exactly how you will attract attention to your project – but in the big picture, these are small things.
You also have to be aware of the rules associated with each crowdfunding website, because they’re all different. If you don’t follow them you may be banned, or your project cancelled. And make sure you’re aware of all fees, because all websites have them.
In the end, if you have an idea you believe in and need some funding, crowdfunding is an excellent way to go.