DEFINITION of 'Donation-Based Crowd Funding'

Donation-based crowdfunding is a way to source money for a project by asking a large number of contributors to individually donate a small amount to it. In return, the backers may receive token rewards that increase in prestige as the size of the donation increases. For the smallest sums, however, the funder may receive nothing at all.

Sometimes referred to as rewards crowdfunding, the tokens for donations may include pre-sales of an item to be produced with funds raised. Donation-based crowdfunding can also be used in an effort to raise funds for charitable causes.

Because this sort of crowdfunding is predicated on donations, funders do not obtain any ownership or rights to the project – nor do they become creditors to the project.

BREAKING DOWN 'Donation-Based Crowd Funding'

If an entrepreneur or inventor has a great idea for a new product or service, crowdfunding offers an alternative way to raise money, as opposed to traditional methods of bank or private loans or by offering equity shares. Through donation-based crowdfunding, the entrepreneur can pre-sell their product to a large number of backers who each donate a relatively small sum toward the project. To encourage higher donation amounts, the entrepreneur may also offer token rewards of increasing value or significance, while retaining full ownership of the project or company being funded.

Examples of donation-based crowdfunding platforms include Kickstarter, Indiegogo, CrowdFunder and RocketHub. Donation-based crowdfunding platforms aimed at fund-raising for charitable causes include GoFundMe, YouCaring.com, GiveForward and FirstGiving. Typically, these services take a 5%-10% fee of all donations.

Different Uses for Crowdfunding

Charities might look to crowdfunding as a means to gather support for relief efforts or causes the organization is championing. For example, disaster relief charities may seek funds to aid in the search, rescue, recovery, and treatment of individuals affected by devastating storms or earthquakes. There may be campaigns for specific needs such as funding the transport of food and clothing to the disaster area. The donations may be sought to support the construction of temporary shelters or the procurement of medical supplies. Crowdfunding might also be used to pay for reconstruction of infrastructure and utilities that would not otherwise be covered by government disaster funds.

At its root, donation-based crowdfunding can be seen as comparable to microfinancing. The requirements of securing money are not as stringent as using a financial institution and the amount of funding being sought may be smaller than the minimum loan or credit amount that is available from a bank or traditional investors. It is not unheard of, however, for the final amount raised through such a platform to far exceed the initial goal that was sought.

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