Introduction to Crowdfunding

 

Crowdfunding (noun)The practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the Internet.

Chances are, as a business, you’ve heard about crowdfunding. One of the most popular methods of the growing range alternative finance options, it’s been estimated that Crowdfunding raised $6.48 Billion for businesses across Europe in 2015.

Although it’s often simply referred to as ‘Crowdfunding for Business’, in actual fact it offers two distinct ways to raise funds; equity-based and peer to peer lending.

Equity Crowdfunding

Includes platforms like:

  • Crowdfunder
  • Seedrs
  • Crowdcube
  • Syndicate Room

Equity Crowdfunding is on the rise and is a popular choice for early-stage businesses. To raise finance in this way you usually need to produce a video pitch that explains your product or service and why people should invest in you. You’ll also outline the percentage of equity you are offering and the amount of investment you need to raise. Minimum investment through equity Crowdfunding is generally very low – and can be as little as £10. It’s also common for campaigns to offer their product or services as part of these investment packages.

Platforms tend to operate an “all-or-nothing” policy. In other words, if your campaign falls short of its fundraising target after a set number of days, all the funding you had received would be returned to your backers.

Advantages:

  • Provides an opportunity for businesses with great potential to reach out to a community of users or partners and invite them to be a part of their success.
  • A powerful marketing tool to reach new audiences through social media and the press.
  • Can attract investors that can bring practical skills and expertise to the business, such as financial management and strategic marketing.

Disadvantages:

  • If you’re going to pursue Crowdfunding for equity, you need to put energy into the campaign to get the most from it.
  • Simply listing your pitch and letting it sit there means it’s less likely to work.
  • By selling equity to the crowd, you may not receive the same value added in terms of expertise that might be gained from adding a few angel investors to your ranks.

Peer-to-peer lending (P2P)

Peer-to-peer lending (P2P) is an online process that matches investors with savings or capital directly with borrowers looking for a loan, like a financial match-making service.

Peer-to-peer platforms include:

  • Assetz Capital
  • ThinCats
  • Funding Circle
  • FundingKnight

To set up a peer-to-peer for your business you’ll need to register as a borrower on your chosen online platform. You’ll then need to submit basic financial records, usually the last 2 years accounts and your most up to date trading figures, along with your last 3 – 6 months copy bank statements. Finally, you’ll then need to answer brief questions about the nature of your business, what the funds will be used for and your future plans.

Advantages:

  • Borrowing via P2P lending is generally a far simpler and quicker process than borrowing from a bank.
  • All the fees are clear and up-front and there are no restrictions for paying back the loan early.
  • It’s an online marketplace that connects established businesses looking to borrow, with people and other investors who want to lend, cutting out the middle man.
  • Loans are both unsecured and secured – NB. For Limited Companies Directors will be asked to give Personal Guarantees.

Disadvantages:

  • Businesses wanting to borrow money will typically have to have their financial information published on an online platform for investors to view.
  • P2P lenders do have strict lending criteria, so you must ensure that you and/or your business have a good to excellent credit history to ensure acceptance of the loan.

If you want more advice on alternative finance options like Crowdfunding or would like to find out more about the business support GetSet for Growth has to offer, simply get in touch with the team to register and gain access to specialist support from our expert finance advisors.