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Crowdfunding is a method for collecting money from a big amount of people and usually you use a platform for it and every person who sponsors you only pays a small amount of money. So that makes it easier for everyone to decide whether you support a project or not. There are different types of crowdfunding, so it could be for a for-profit project or for a nonprofit project and it could be with reward or without. Quite often it’s with a reward. This could be a product that you want to produce anyway, then it’s like a preorder of your product or it could also be another service or another project just as a thank you gift. And then there’s also a type of crowdfunding where you don’t really have physical rewards. So the reward is more like good karma. This is especially used in nonprofit crowdfunding campaigns. When it’s for a caritative project, for example. Then there’s one other type of crowdfunding which is called crowd investing. And there you get a share of the company which can be a profit share as well or just without a profit share. But that’s a special type of crowdfunding, I’d say. So we focus more on the general crowdfunding, but they all have in common that you use a certain platform usually, which is online and you present your project there as well as the possible rewards and you present the targets of the project as well as the financial target. And usually it is taking place within a certain terminated period of time and you have multiple sponsors in the end.
There are different advantages and disadvantages of crowdfunding. So when we look at advantages, many crowdfunding platforms are made in a way that you either get everything or nothing. So when you don’t reach at least the first financial target of your crowdfunding, then you’ve got, don’t get the money. It goes back to the sponsors and on the other side, you don’t owe the sponsors any rewards. This can be especially good if you have a big project where I need at least this or that certain amount of money to realize it, then it’s important that you don’t owe people anything when you don’t reach this amount of money. On the other hand, sometimes any small amount of money is useful. Even if you don’t reach the first target, then this could also be a disadvantage. But there are also platforms which you can use where they don’t have this criteria. On the other hand disadvantages can also be that you might need a lot of money for the campaign around it. So for marketing especially, and this could eat up even more money than the campaign brings in the end. So you really have to make sure that the marketing isn’t too expensive in the end. Besides that, another advantage can also be that the crowdfunding itself is a marketing method for a product or project. Another advantage of crowdfunding campaigns can be that you can test your product or your service if it is reaching the target group. But this can also be misleading because sometimes the crowdfunding campaign isn’t successful but has got other reasons. So you might think my product or my service is not good, but it’s just the campaign which wasn’t good. So this can be an advantage as well as a disadvantage. So make sure that you really think about the results before stopping your project too quick. Crowdfunding is often used by small companies or startups, or persons who are even before starting a business. So they just want to launch a product, maybe test the market and find out if they want to start a business with it. And I think these are good cases for doing crowdfunding.
You have to make sure that the target group is including the taxes you have to pay in the end. So depending on the product you offer, you have to pay tax on it. If it’s really just a caritative project and you don’t have to pay tax, but if it’s about selling a product in the end and a reward can be a product that you kind of sell, then you have to pay tax on it, which is between seven or 19% in Germany. But when you ship it into another European country, it can even be 0%. So this is not really clear, you have to do research on that, how much tax you have to pay on it in the end or get some advice.
