We've all heard of crowdfunding, but what is crowdfinancing?
At this point, crowdfunding is an extremely well known term in the english language. Websites like Indiegogo and Kickstarter blew up in around 2010 and have catapulted crowdfunding into pop culture. While the main definition of crowdfunding involves participating in a campaign and receiving a physical product as your reward, other variations exist such as charity crowdfunding, and with recent legislation, equity crowdfunding.
As with everything in our society, new innovations and branches of ideas emerge. So what exactly is this new branch of crowdfunding called crowdfinancing?
Crowdfinancing can be seen as a mix between crowdfunding and traditional debt financing. Debt financing is typically defined as, "providing funds for business activities in which lenders want to be paid a rate of interest in exchange for the use of their money." So it stands to reason that the definition of crowdfinancing is, "providing funds for business activities through a collective effort of individuals who hope to be paid for the lending of their money"
Essentially, it's a specific type of crowdfunding that is limited to the funding of business activities that has a financial reward for participating in unlike the overarching crowdfunding term which encompasses other rewards such as emotional and physical rewards.
Expect Crowdfinancing to grow
Just like crowdfunding became part of pop culture in 2010, we expect crowdfinanicng will see the same growth in the upcoming years. Traditional financing for businesses in the United States has been extremely tight with lending since 2008 which has resulted in several innovations within the industry. The fact is, businesses will always need outside capital to grow their businesses. If traditional solutions aren't lending, businesses will find somewhere new to access that capital. Several option exist for accessing that capital but crowdfinancing doesn’t require giving up equity for capital and is the most similar to traditional models.
We've already begun to see the success of P2P lending, a form of crowdfinancing that is typically limited to extremely high net worth individuals. As the financial barriers to entry for lenders are lowered, the mass markets will have the ability to access financial earning strategies previously unavailable to them. Expect to see a decrease in the cost of accessing this capital for businesses as the amount of available capital from crowdfinancing increases. Companies such as Kickfurther are already working to lower these barriers to entry through their Online Consignment model in which individuals can partner directly with existing brands on the basis of the sales of inventory and earn a share of their profit for as low as $20.
The future of Crowdfinancing
Much like other successes in the emerging sharing economy, the crowdfinancing industry leverages the unused assets of the masses to match the needs of others. As the supply of available capital increases, traditional lenders will have added pressures to innovate in order to compete with the new industry.
With the tight regulations surrounding the lending of capital, anticipate seeing crowdfinancing face push back from the legal system. The S.E.C. and other governing bodies will be carefully monitoring crowdfinancing platforms. While there has been progress regarding the legislation surrounding crowdfunding such as Title III of the Jobs Act which opened up equity investments to non accredited investors, the industry is still attempting to find its footing.