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Boom times for UK crowdfunding industry

Funding Circle, which offers peer-to-peer loans to businesses has lent over £200 million to UK businesses in just over 3 years, as the crowdfunding industry looks set for a bumper 2014.

The organisation, which started with three co-founders back in August 2010, provides an alternative form of lending to growing businesses, as well as the opportunity for investors to realise better returns than from bank deposit interest.

According to its first report of 2014, Funding Circle lent £130m last year alone – and was responsible for the creation of over 6,000 new jobs. Judging by the speed with which the group has reached each successive £50m lending milestone, this is a business lending model which looks set to grow strongly this year.

How Funding Circle works

To apply for loans of £5,000 or more, your business must have a minimum turnover of £100,000, two years’ filed accounts at Companies House, and be a limited liability company or LLP. Loans are repayable over periods between six months and five years.

In a marked difference to the traditional lending model, businesses borrow from registered individuals following an auction process where potential investors (62,000 are registered on the site) compete to lend funds. This process results in the borrower securing the lowest rates of interest available.

Applicants can then accept the loan once it has been fully funded, or keep it live hoping for more competitive bids to be made.

A model for the future?

There are now hundreds of crowdfunding platforms operating worldwide – offering a variety of lending solutions for new ventures – including debt lending (i.e. you repay a loan), or equity lending (individuals invest in exchange for a stake in the business).

Donation crowdfunding involves individuals investing in a cause, without expecting anything in return – such as funding the recording of a new album in exchange for a credit or free concert tickets.

There are dedicated platforms for different types of business – technological investment, or ‘ethical’ investment, for example.

You can invest as little as £5 on most platforms, but of course should be aware that there are significant risks involved in making any type of investment.

Given the rapid growth in Peer to Peer lending in recent years, is will come as no surprise that the Financial Conduct Authority (FCA) is planning to introduce new regulations for the industry from April 2014.

New Crowdfunding Regulations coming soon

For loan-based crowdfunding platforms, the FCA has published a number of proposals to provide protection for all parties involved; including providing clear information on potential investment propositions (without downplaying the risks involved), protection for investors in case the P2P platform collapses, clear interest rate comparisons must be provided, and a minimum prudential requirement.

For investment-based crowdfunding platforms, the FCA plans to make changes to its existing regulations, rather than creating new rules.

You can also download the FCA’s regulatory approach to crowdfunding here.

Also, watch this bite-sized BBC video on how several UK businesses have benefited from using the crowdfunding model to get their ideas off the ground.

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