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Crowdfunding – an alternative way to fund your small business

Crowdfunding is an increasingly popular way to raise funds for your small business and if you think you can persuade the masses to give your idea a chance then do not hesitate to get your crowdfunding started. In 2016 crowdfunding provided 15% of total UK startup and venture-stage equity investments, and it continues to grow at a phenomenal rate. Here, we take a closer look at this innovative method to funding your small business idea.

What is Crowdfunding

What is crowdfunding?

As the name suggests, crowdfunding platforms enable groups of people to pool their resources to invest in new ideas – either for profit, or to help causes they believe in.

Post credit crisis, this type of alternative funding has grown at a rapid rate and it still continues to increase. Kickstarter, a US-based platform raised just under $580 million in 2016 alone, and UK-based Funding Circle raised £2.6 billion for new businesses in the six years since they were founded.

Many small firms have been unable (or unwilling) to secure traditional bank lending, so securing funds from a collective of willing investors is an attractive alternative. Firms have the opportunity to raise money from like-minded individuals without having to wade through layers of red tape, and would-be investors have the chance to invest in what could be the ‘next big thing’ – for a profit, or otherwise.

Potential investors should be aware that they take on a risk when funding any type of new business – Kickstarter reports a ‘success rate’ of just under 44%, for example. If you’re a small business owner, on the other hand, this type of investment idea could be just what you’ve been looking for.

So, what types of ‘crowdfunding’ options are there?

There are a number of different types of investment available via hundreds of online crowdfunding platforms.

1. Debt – where a community of investors lend money to fund a new business idea. Otherwise known as peer-to-peer lending, loans are paid back over time, at a pre-agreed rate of interest.

2. Equity – where investors trade cash in exchange for a share in the business. In 2014 when there was a huge increase in the use of crowdfunding website, the FCA made changes to its existing regulations to govern crowdfunding equity investments – which will protect all parties.

3. Donation – where investors do not expect to receive anything in return. Often used to fund social or political movements, including charity work. An example of a donation model is JustGiving.

4. Reward – investors providing the funding for a new scheme or business in return for the promise of future ‘perks’. You may be the first to receive a prototype gadget, for example. US-based Kickstarter is the most well-known example – the site matches potential investors with projects as diverse as creating new comics, funding art exhibitions, and filming full-length movies.

Crowdfunding sites

The massive rise in interest in alternative funding since the recession has resulted in the creation of literally hundreds of crowd sourcing platforms. These sites typically take a fixed percentage cut of the total amount raised in return for listing the auctions, and oversee the entire process.

Some of the leading UK sites include:

Funding Circle – has just announced total lending has passed the £2.6 billion mark from 2010 to 2016.

CrowdCube – lists over 427,880 registered investors, and on average raised over £440,000.

Seedrs – in 2016 over £85 million has been invested on campaigns and 45, 000 investments have been made.

For general information, try the UK Crowd Funding Association, and NESTA’s microsite.

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