Although relatively new to the Norway region, many areas of the world utilize crowdfunding. Whether it be a start-up project or needing a little more push for your business, crowdfunding is beneficial for every level of businesses and investors.
So how does crowdfunding benefit the investor and the business? First, we need to understand what crowdfunding is, and how you can get yourself involved to start investing.
What is Crowdfunding?
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Crowdfunding is a combination of microfinancing and crowdsourcing. The result, individuals come together to help support projects and companies across the world. These people front the money in the start-up of a small business, either as a gift or with an expected reward or return.
Crowdfunding can be used as an investment as well. It is called equity crowdfunding or loan-based crowdfunding, and it has the potential to shape the future of individual investing. You invest in the start-up of a company with expected returns to you down the road.
Take, for example, some Norwegian companies. You open up an investment account with the company to contribute to loan-based crowdfunding. When you deposit money into this account, those funds go to the selected loan you want to invest. You can see who the client is, what the project is about, how much the client is requesting and the interest rate. Once the client signs the loan, the investment is deducted from your account.
Your return is the monthly interest payments made by the client. You can expect a return from about 5 to 15 percent on your investment. Since the Norwegian economy is relatively healthy and stable, the risk factor for investment is relatively low compared to the expected returns.
How Does This Benefit the Investor?
Using crowdfunding as an investment has many benefits for the investor. These companies like mentioned above, allow you to look into the investment and gather information before making your final decision. You do not have to dive headfirst into the investment. Instead, you have the option to collect as much insight beforehand as you like and then make your decision from there. If you do not go ahead with the investment, the personal growth you gained will help for a different investment or push you for your own venture.
You are also helping support the development of the economy. Without your investment into start-up ventures and new small businesses, chances are they wouldn’t be able to get off the ground. Since the economy is stable with low interest and annuity rates, the gain greatly outweighs the risks. The result for the investor, high returns.
Since you want to shy away from putting all your investments into one company, crowdfunding allows you to spread yourself across multiple small investments. So even if one start-up project doesn’t take off, you still have other ones to fall back on.
How Does This Benefit the Business?
The more significant benefit of crowdfunding for a small business is the money they gain. They can access funds in different ways than a bank loan.
Starting up a business is quite risky. Trying to gather enough funds while validating yourself within the market without people trying to buy your company can be very difficult. With crowdfunding, not only do you get the funds you need, but you also get that market validation without losing equity in your company. It is an excellent learning experience for the business.
Crowdfunding is also a way for a business to start marketing themselves. They need to make an excellent pitch to potential investors to get their loan. You are then forced to put yourself out there, using social media and other ways to direct traffic to your company.