Meaning of Crowdfunding and Its Overview

Table of Contents

What Crowdfunding Means?

Crowdfunding is the use of a small sum of money from a large number of people to fund a new business initiative. Crowdfunding connects investors and entrepreneurs by making the easy accessibility of vast networks of people via social media and crowdfunding websites, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives, and venture capitalists.

Crowdfunding has quickly become the fastest way of fundraising for many humanitarian causes and business support in a country like India. This is due to Indian culture’s illustrious history of charity, inventiveness, and community support. Before we get into how crowdfunding works in India, let’s define the phrase.

You may have heard the old proverb, ‘every drop makes an ocean’. Crowdfunding exemplifies the adage. Crowdfunding is a group of people coming together to raise money for a specific aim. Donors offer whatever monetary resources they can to assist the fundraiser in meeting a greater goal.

How it Works

So, how exactly does crowdfunding work? What is the procedure, and who are the participants? These are important things to consider if you want to be a part of the online crowdfunding ecosystem, whether as a donor or a beneficiary.

A fundraiser usually involves three parties: the beneficiary, the crowdfunding platform, and the donors. The beneficiary is the person who initiates the campaign and requires the funds. A non-profit or another individual can frequently launch a crowdfunding campaign on behalf of a benefit or beneficiaries. The campaign is hosted by a crowdfunding platform, such as Ketto. Donors are people who make contributions to the cause via the platform.

Crowdfunding has enabled businesses to raise hundreds of thousands or millions of dollars from anyone who has money to invest. Crowdfunding allows anyone with an idea to present it to a group of eager investors.

Kinds of Crowdfunding

The two most conventional applications of the term represent the type of crowdfunding done by start-up companies aiming to introduce a product or service into the world, as well as by individuals who have encountered an emergency. Many people who have been afflicted by a natural disaster, a large medical bill, or another catastrophic incident victims such as accident have gotten financial assistance that they would not have received otherwise, owing to crowdfunding services.

In a country like India, three types of crowdfunding are prevalent

Donation based
Reward based
Lending from peers.

In recent years, however, several crowdfunding sites, such as Patreon and Substack, have expanded the scope of crowdsourcing to provide a method for creative people—artists, writers, musicians, or podcasters—to continue their creative labor by obtaining a continuous stream of revenue.

Equity-Based Crowdfunding: By exchanging funds for equity shares, equity crowdfunding allows investors to become part-owners of the company. The equity owners receive a financial return in proportion to their input (a share of the profits in the form of a dividend or distribution.) The most common type of crowdfunding is this.

Reward-based crowdfunding : It is individuals donating to a business in exchange for a reward, which is often a form of the product or service that the firm provides.

The distance between the inventor and the investor is irrelevant in this form of finance. Non-equity crowdfunding has many elements of rewards-based crowdfunding.

This form of funding is employed in a variety of situations, including free software creation, film marketing, scientific research, civic endeavors, and new technologies.

Crowdfunding based on donations/ peer to peer lending: It is a method of raising funds for a project by asking a large number of people to donate a small amount without expecting anything in return.

This form of funding is primarily used for social objectives, and nothing in return is asked. Natural disasters, disaster assistance, charities, and medical bills are all common sources of income.

Benefits of Crowdfunding

The most obvious benefit of crowdfunding for a start-up company or individual is the ability to gain access to a larger and more diverse pool of investors/supporters. Because of the widespread use of social media, crowdfunding platforms are an excellent way for businesses and individuals to expand their audience while also receiving the financing they require.

In addition, many crowdfunding initiatives provide incentives to investors, such as the opportunity to participate in the launch of a new product or get a gift in exchange for their investment. For example, a new bacon fat soap business would offer a free bar to everyone of its investors. Video games are the most common crowdfunding investment for gamers, who are frequently rewarded with early access to the game as a result of their contributions.

Equity-based crowdfunding is gaining traction because it allows startups to raise funds without handing over control to venture capitalists. It may also provide investors with the potential to gain an ownership stake in the enterprise. Equity-based crowdfunding is regulated by the Securities and Exchange Commission (SEC) in the United States.

Some more benefits of crowdfunding are as follows :

It gives money to a lot of innovative concepts.

It offers tax breaks to a large number of new businesses in the country.

During natural disasters, crowdfunding is useful for promoting social causes.

It is also useful in securing funds for poor people who cannot afford the costs of serious illnesses such as cancer and kidney transplants.

The ability to consolidate and streamline fundraising efforts is one of the best features of internet crowdfunding.

Disadvantages

The potential damage to your or your company’s reputation caused by “resorting” to crowdfunding, the fees associated with the crowdfunding site, and, at least on some platforms, if you don’t meet your funding target, any funds promised will be returned to your investors and you will receive nothing.

Fundraising tax laws in India

Donations to certain non-profit organizations in India are tax deductible. Individuals who donate to a non-profit organization having a valid 80G certification may be eligible for a tax deduction of up to 100%.

Simply explained, if you donate to a registered charity organization, it counts as a 50% or 100% deduction from your gross annual income. This lowers your taxable income and allows you to save even more money. You can claim deductions with or without an ‘upper limit,’ depending on the charitable trust.

Make sure the non-profit you’re donating to has its 80G accreditation to take advantage of the crowdfunding tax rules. You will receive a donation receipt once the donation has been made, which must be provided when claiming tax deductions.

Crowdfunding and Tax Deductions

In ketto, after deducting Ketto fees, PG fees, and GST, the money raised on Ketto can be withdrawn. The amount left over after this deduction may be subject to taxation in India.

Fundraisers who qualify for a tax exemption will have this information displayed on their campaign page. In the acknowledgement email, you’ll also get a notification if you made a tax-deductible donation to a fundraiser. If the information is not included in your email, the donation will not be eligible for tax exemption.

To get your 80G receipt, follow the steps below:

Go to the Ketto account that you used to make the donation and sign in.
Click on the profile and then go to donation history
Click on download 80G to download it in the pdf format.

What Is Crowdfunding and How Does It Work?

If you think crowdsourcing is a novel concept that is slowly gaining traction, think again. It has been done in India since ancient times, mostly for the purpose of raising funds for cultural and religious objectives. Back then, we dubbed it “Chanda.” Crowdfunding, as we know it now, emerged in the West and is one of the finest financing choices for any cause, particularly if it has a broad appeal.

Conclusion

So that’s all there is to know about the definition and sorts of crowdfunding. However, numerous examples of cybercrime are occurring in this digital age. We have heard of cases of fraud, especially when it comes to crowdsourcing donations for cancer treatments. So investors must carefully assess the cause they are contributing to.

Ketto is a crowdfunding platform that raises donations for a variety of causes, including NGOs, non-profits, and creative and personal causes. It is situated in Mumbai and was founded in 2012. Visit Ketto to make more informed crowdfunding choices, and to succeed in your crowdfunding venture.