Advantages and Disadvantages of Crowdfunding

Crowdfunding has been present for ages the only thing that has changed is the way of raising the funds from the crowd. In the past people use to raise funds from their relatives and friends for doing business or any task whereas in the present day people raises funds from all over the world from unknown people to kick start their business or doing any particular task. Crowdfunding as the name suggests refers to that practice using which an individual raises funds from a large number of people. Crowdfunding is of four types which are reward based, donation based, equity-based and debt based. In order to understand it better let’s look at some of the advantages and disadvantages of crowdfunding –

Advantages of Crowdfunding

  1. The first and foremost advantage of crowdfunding is that it is the easy and cheap way of raising funds for your project because if one adopts donation based crowdfunding then there is no cost involved and in the case of debt crowdfunding also it is cheaper than taking a bank loan or finance from loan companies.
  2. Another benefit of crowdfunding is that sometimes banks or financial institutions do not give loan for some projects due to their strict guidelines and that is where crowdfunding can be a boon for the proprietor as many interesting projects remain on papers only due to non-availability of funds but crowdfunding ensures that creative ideas turn into profitable business.
  3. Another benefit of crowdfunding is that helps the company in creating awareness about the product and also a free marketing campaign because a successful crowdfunding project can ensure that company is able to generate enough headlines so as to make consumers curious about the product which it will be offering which in turn can lead to successful launch and acceptance of the product by the consumers.

Disadvantages of Crowdfunding

  1. The biggest disadvantage of crowdfunding is that out of 100 projects only 1 or 2 projects get funds from the public successfully which makes the success ratio of crowdfunding very low and hence any company thinking of going to crowdfunding route should keep in mind the low success ratio as it can be demoralizing for the company because of the effort put to raise funds via crowdfunding are huge and it can go in vain.
  2. Another limitation of crowdfunding is that since it involves revealing your idea on the internet and in public domain so as to get the funds there is this risk that someone else can steal or copy the idea and start business before you get the funds and hence protecting the idea though patent or trademark is the logical way of avoiding such situations.
  3. Another disadvantage is that since the company or individual has got the funds for free there is this human tendency to take it for granted anything which we get free and the individual may not do hard work to take the company to new heights which would have been the case if his or her own funds were invested.

As one can see from the above that crowdfunding has both benefits, as well as limitations and any company thinking of raising funds through crowdfunding, should carefully analyze the above points and then take the decision.

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