Long-Term External Financing Options: A Look at Crowdfunding
Written on
Chapter 1: Understanding External Financing
External financing refers to funds sourced from outside a business. Crowdfunding is a prominent example of this category. When companies require capital for extended periods, typically exceeding five years, it necessitates long-term financing strategies.
The need for long-term finance varies depending on the type of Fixed Assets or Non-Current Assets being acquired. For example, purchasing lower-value assets like vehicles may require a smaller amount of long-term funds. Conversely, acquiring higher-value assets such as new assembly line machinery will demand a more substantial financial investment.
Section 1.1: What is Crowdfunding?
Crowdfunding involves gathering small amounts of money from a vast number of individual contributors to support a new business endeavor. It is particularly popular among sole proprietorships and partnerships seeking initial funding for their startups.
Subsection 1.1.1: Mechanisms of Crowdfunding
Crowdfunding typically occurs via online platforms like Kickstarter, Indiegogo, Crowdcube, and others. These websites provide entrepreneurs the opportunity to showcase their innovative ideas to millions of potential investors willing to contribute modest amounts, such as $10, $20, or $50. The process continues until the entrepreneur achieves their desired funding goal.
Entrepreneurs use these platforms to articulate their business concepts, product offerings, objectives, and funding needs to potential backers. If the venture proves successful, those who invested through crowdfunding can expect to receive their initial contributions back along with interest or an equity stake, which represents a share in the profits.
Section 1.2: The Appeal of Crowdfunding for Businesses
Crowdfunding presents a crucial financial avenue for new startups, particularly when entrepreneurs lack the necessary capital to establish their businesses. Traditional banks often hesitate to lend to individuals without a track record of success, and loan interest rates can be prohibitively high for newcomers.
By leveraging crowdfunding, small businesses can access capital that would otherwise be challenging to secure through conventional means. However, they face the responsibility of maintaining accurate records for potentially thousands of investors to manage interest payments and profit-sharing effectively.
Chapter 2: The Investor's Perspective
Why do individuals choose to invest in crowdfunding? Many hope to see a return on their investment. However, it's essential for potential crowdfunding investors to recognize that the failure rate for new businesses is significant. Consequently, there is a possibility of not receiving any returns.
Moreover, some social enterprises may not focus on generating substantial profits, meaning that contributions may simply serve as donations to support a social cause.