You’ve heard about crowdfunding, but do you know what this financing method is and how it can help you? In this guest post, Dave Lavinsky shares some insights.

Crowdfunding is one of the newest and most powerful methods that entrepreneurs and business owners can use to raise money. As the name implies, Crowdfunding is getting a group of regular individuals (the crowd) to collectively fund your company.

There are four core types of Crowdfunding.

The first is charitable donation-based Crowdfunding. This is when organizations such as The American Red Cross conduct social media and other campaigns to get individuals to donate. Likewise Wikipedia requesting donations on its website falls into this category.

The second type of Crowdfunding is debt-based whereby the crowd (as opposed to banks) lends funding to other individuals (who may be business owners funding their companies) at favorable interest rates. This type of Crowdfunding is also known as peer-to-peer lending.

The third type of Crowdfunding is rewards-based. In this type of funding, the entrepreneur or business owner gives specific rewards to those who fund them. In most cases, these rewards are the product or service the entrepreneur plans to create. For example, an entrepreneur may want to create a new widget but doesn’t have the funding. So, they ask others to essentially pre-buy the widget, that is provide funding now in return for the future reward of receiving the widget once it’s created.

The final type of Crowdfunding is equity-based. In this type, individuals who fund you receive equity in your business and become shareholders. Equity-based Crowdfunding has been successfully used in England, France and several other countries. In the United States, despite being approved by Congress and the President, it is not yet legal as it must undergo final SEC review and approval. But by the end of this year, it is expected that equity-based Crowdfunding will be legal here too.

What’s so exciting about Crowdfunding is that it has benefits beyond just funding. For example, the process of trying to raise Crowdfunding in order to launch a new product or service provides great market research. If individuals eagerly fund you, the new product or service is probably a great idea. If they don’t, it probably means you shouldn’t launch it.

In addition, those who fund you will most likely become loyal customers who provide positive word-of-mouth marketing to their friends and colleagues. Such a marketing asset can increase both a business owner’s short-term and long-term revenues and profits.

Dave Lavinsky is the President of Growthink, a consulting firm that, since 1999, has helped over 500,000 entrepreneurs develop business plans, raise funding and grow their businesses. Growthink’s Crowdfunding Formula teaches entrepreneurs and business owners how to raise rewards-based Crowdfunding. Follow Dave on Twitter at @davelavinsky.