Surely, on some occasion you have heard of the term crowdfunding. It is a concept that is the order of the day, especially in the world of startups and entrepreneurship. In today’s post we will see what it is and how crowdfunding can be used for a Nigerian company, the different types that exist and how this form of financing can be carried out.
What is crowdfunding?
Crowdfunding in Nigeria, is a form of financing that consists of using the capital that numerous investors have provided through small contributions. Normally, the entire process is done online through specialized platforms.
Depending on the type of reward investors receive, there are different models, which are not affected by the type of project to be financed. Let’s see, below, the different types of crowdfunding that we can find and what type of taxes each one responds to.
Different types of crowdfunding in Nigeria
1. Donation crowdfunding
This type of crowdfunding is mainly characterized by the fact that the investors who contribute capital in this type of project do not expect to receive a profit, they do so completely altruistically. They are usually actions led by NGOs to raise funds for projects of a social or humanitarian nature. The usual thing is that they have a maximum duration of three months.
How is it taxed?
In this type of projects, legal entities must declare each income in the Corporation Tax. In the event that the project is led by a natural person, this person must declare the income on the Inheritance and Donations tax.
2. Reward crowdfunding
This type of crowdfunding for a Nigerian company is the best known and the one with the highest collection volume in the market. In this case, unlike donation crowdfunding, investors do receive a benefit for their contribution of funds.
Investors contribute an amount to a specific project in exchange for a non-monetary reward, it can be a sample of the product itself, experiences or certain services offered by the company as a thank you. The rewards will vary depending on the amount contributed to the project, sometimes in the larger amounts, internal collaboration in the project itself is offered as a reward.
How is it taxed?
In this case, legal entities will attend to Corporation Tax and VAT. On the other hand, natural persons will include it in personal income tax and VAT.
3. Loan crowdfunding
It is crowdfunding in which an interest rate is applied to the money contributed. The investor contributes capital to the project in exchange for that amount being returned by applying an interest rate, interest known as the “price of money”.
On some platforms, each lender establishes the interest rate at which it lends the money, in this way, the recipient must return the money received plus the interest rate.
How is it taxed?
For legal entities, the interest will be taxed as a deductible expense in the Corporation Tax. Natural persons, interest will be taxed as a deductible expense in personal income tax.
4. Investment crowdfunding
In this type, investors receive shares in exchange for their contributions. It is the only model in which investors become part of the financed project.
One of the main characteristics of this type of financing is that the company has to be an increasingly fruitful society and thus be able to distribute benefits to its investors.
Normally, in this model, the amount contributed is usually higher than in reward crowdfunding, but the reimbursement is much slower.
How is it taxed?
It is the only form of financing that is exempt from Corporation Tax and VAT, as long as shares or participations are obtained.
Advantages and disadvantages of crowdfunding for a Nigerian business
The multiple advantages that crowdfunding has make it one of the most used ways by entrepreneurs to promote their projects. Although, like any other type of financing, it has its advantages and disadvantages, let’s see some of them.
- It allows to obtain the necessary capital in a relatively short period of time.
- It is a useful method to intuit or not the viability of a project , if there are many people interested in contributing capital it is because they see great possibilities of success.
- In addition to creating a community that serves as support for the project, crowdfunding also allows you to monitor the project and know how much capital has been raised at any given time.
- It is not possible to know if the total required capital will be obtained until after some time has elapsed and this will also depend on the contributions of the investors.
- Through crowdfunding, the risk of plagiarism is assumed, if a project that is not previously registered is made known, another person can copy it and launch it on the market.
- It is necessary to give visibility to the projects , it is not enough to be on a crowdfunding platform. If there is no alternative communication channel, it is very difficult for the idea to reach potential investors.
As we can see, crowdfunding has both advantages and disadvantages, just like any other means of financing. Now that we have seen the different types of crowdfunding there are, you can analyze which one best fits your project.