Crowdfunding: How to Do It and When it Works

I’m sure most of us have heard of crowdfunding and popular sites like GoFundMe. What you may or may not know, is that crowdfunding is changing the way people donate and fund important expenses.

Crowdfunding is quite new and still developing, but it’s basically creates a way for people to donate to other people’s projects, needs, and causes generally through an online platform. This is huge, because most crowdfunding campaigns can be shared on social media or via email to reach a broader audience and generate more support.

This practically eliminates the limitations of only being able to ask people you know or see in person for financial support. Plus, for people who have admirable projects and causes, it offers an alternative to costly financing.

How Does Crowdfunding Work

Starting a crowdfunding campaign is easier than ever thanks to websites like GoFundMe.com. The project initiator will start by choosing an online platform to share their campaign. Other popular platforms include: KickStarter, TeeSpring, Prosper, Lending Club and GiveForward.

Then, you’ll need to propose an idea or need and describe it in detail, then share it on your platform of choice and allow individuals and groups to donate. Donating through one of the platforms I mentioned above is safe and you can easily transfer the funds to your bank account.

When Does it Work?

Crowdfunding sounds simple enough, but in reality it’s not that easy to convince people to give their money away. Sometimes I fantasize about eliminating all of my student loan debt through crowdfunding. I only have $17k left but even if I asked people to donate $30 each, I would still need over 500 donations.

Success through crowdfunding starts with your cause along with your social reach. Most crowdfunding campaigns are geared toward admirable causes. Some well-performing campaigns I’ve personally seen in the past were for a school trip for a student, funding for medical expenses for someone with a serious illness, and a very popular campaign for one of my friends whose apartment caught on fire and destroyed all her son’s belongings along with hers. Someone started a crowdfunding campaign for my friend and she ended up receiving $8,000 in donations from people in our small town but it was after losing her home.

People who are experiencing unfortunate events and lack the financial support to provide a solution may do well with crowdfunding. In my case, I don’t think I would find much success if I wanted to start a crowdfunding campaign to help me pay off my student loans because I am doing okay financially, have a job, a roof over my head, and I’m fully capable of earning an income to help me pay off my debt. People may not have the desire to give me any money for that cause.

On the flip side, you don’t have to endure a tragedy or be struggling severely in order to utilize this method of funding. Your cause simply needs to be meaningful and resonate with people.

If you want to start a business or non-profit that helps people, or travel to volunteer or make a difference in someone’s life, odds are you will come across some people who will support your cause and be willing to donate.

If you have a goal or serious need and don’t have the money to fund it, crowdfunding may be a solution but you’ll need to share your campaign and ask others to do the same to spread awareness. It also helps to list a clear goal amount in the description of your campaign so people know what you are aiming for and can consider helping you reach that goal when giving a donation.

Debt-Based Crowdfunding

On the surface, crowdfunding seems like it works only for admirable causes and charitable donations. There is a specific type of funding that is geared toward helping people eliminate their debt and it’s commonly referred to as peer-to-peer lending which totaled about $5 billion in 2014.

With peer-to-peer lending, borrowers apply online on sites like Lending Club for financial assistance to help pay off their debt. Lenders are regular people who provide funding to receive a return on their investment when borrowers pay interest.

During the application process, each applicant’s credit risk is analyzed to determine which lender would be willing to provide funding and at what specific interest rate. Debt-based crowdfunding is not considered a free donation but more like a small loan. The benefit of using this option though, would be if you have excellent credit and can secure a low interest rate with a lender.

If you have high interest debt or a large balance, peer-to-peer lending may be able to help you pay off your debt faster.

On the contrary, if you have a low credit score or are in a financial bind and won’t qualify for any other loans or debt relief, peer-to-peer lending may be able to provide you with funding even though you seem like a risk but your interest rate will be higher.

When to Use Crowdfunding

In my opinion, crowdfunding shouldn’t be your first choice. Even though it’s a valid option, it’s quite new and people are still experimenting with it. Cutting back on your expenses and boosting your savings so you can cover some of your own expenses should be your first move.

The next step should be analyzing your need or your cause before you share a campaign. Realize that putting your situation out there in public will open the door to judgement and maybe even some criticism, but you should also receive support. Donors may even want to see how you are using the funds and request a follow up.

If you don’t reach your goal, most platforms won’t penalize you or charge you any fees, and by sharing your story and needs, you’ll most likely wind up with more money than you had initially to say the least. My only precaution is to use crowdfunding wisely and not take advantage of it. If you’re intentions aren’t genuine, people will easily realize that.

Have you ever done a crowdfunding campaign before or would you ever try crowdfunding? What benefits or setbacks to you see with this method?

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