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Crowdfunding is our business, although you may know our branch of the industry by another name: peer-to-peer lending. One of the more well-known types of of crowdfunding, peer-to-peer lending isn't the only crowdfunding category. Let's take a closer look at some of the different types, so you can be sure you're raising or investing funds using the crowdfunding model which suits you best.

What are the different types of crowdfunding?

Generally, there are five major types of crowdfunding used around the world. These include:

• Peer-to-peer lending
• Donation-based crowdfunding
• Rewards-based crowdfunding
• Equity crowdfunding
• Profit-sharing crowdfunding

Crowdfunding connects the people who want to make change with the people who want to see change happen. Whether donating or investing, crowdfunding puts people in control of their money and how it is used to affect the world around them, whether for financial return or out of a desire to make a difference for the wider good.

UK Crowdfunding Association

Let's have a closer look at the types of crowdfunding:

Peer-to-peer lending

This is us here at rebuildingsociety.com. It can also be called debt crowdfunding or debt-based crowdfunding. We, and others in the industry, usually refer to 'peer-to-peer lending' or even more precisely as 'peer-to-business lending' in our case. These are often abbreviated as P2P and P2B lending.

With this crowdfunding model, a large number of individual investors each makes a contribution to a person or business in the form of a loan. The loan is paid back with interest over time, usually as an amortising investment. It is similar to the traditional method of borrowing from a bank, except that a business borrows from many individual lenders instead of one bank.

Donation-based crowdfunding

With this model, individuals donate to meet a fundraising goal for a specific charitable project without necessarily receiving anything in return.

This works best for social and community fundraisers, medical expenses, and other charitable giving.

Rewards-based crowdfunding

This model is similar to donation-based, however the person donating money does expect to get a 'reward' of some sort. Individuals donate to a project or business with the expectation of receiving a non-financial reward at a later stage in exchange for their contribution.

Examples of rewards include various goods and services, such as product samples and t-shirts.

Equity crowdfunding

This model is a cross between peer-to-peer lending and venture capital, and is also called 'investment crowdfunding'. Entrepreneurs raise funds for their business by selling shares of their business to outside investors in exchange for capital. In so doing, the investor becomes a shareholder of the business.

This is a popular way for start-ups to raise funds, although the entrepreneur loses some control of the business to the shareholders.

Profit-sharing crowdfunding

With this model, businesses can share future profits or revenues with the crowd in return for funding; it also known as 'royalty-based crowdfunding'. Lenders are not shareholders; they only receive earnings when the project or business venture begins to generate revenue (not necessarily profit).

This method is often used for a new launch, such as a mobile app or product, where backers can provide support before the app or product is fully developed or launched, and then share in the revenue post-launch.

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What's the best type of crowdfunding for you?

For charitable causes, donation and reward-based crowdfunding are the obvious choices.

Start-ups will struggle to get a peer-to-peer loan, so for these companies, equity crowdfunding may be the best choice. This is a time-consuming process, and the entrepreneur will need a solid marketing plan to convince potential backers to get on board.

Artists, film makers, app developers, and inventors will benefit more from profit-sharing crowdfunding. If they expect to have a high profit margin from the outset, and can demonstrate this to investors, as well as show the value and potential for success of project, it can be a good way to get started. The process will take months of hard work to get off the ground.

Established businesses will do best with peer-to-peer lending. It's quick, it's simple, and the entrepreneur or business owner does not give up any equity in their business. This makes it the best choice for established businesses.