8.3 Crowdfunding

Crowdfunding has enabled start-ups and microbusinesses with no tangible assets to offer as security, no track record of profitability, and limited internal cash resources, to use their existing customers and supporters to provide the funding they need to develop their business.

Crowdfunding offers online funding opportunities to the public, rolling up small sums of money offered by many individual lenders or investors, sometimes as little as £10, to form a potentially large amount for the borrower. Matching borrowers to willing lenders is usually made via the platform which distributes requests for funds to borrowers. Potential investors and donors can see the amount of support from others and may be influenced by supporters’ comments and business updates during the funding period. There are different types of crowdfunding:

• Investment-based or equity-based crowdfunding – the investor receives a share in the business in return for their funds and the lender receives interest and repayments as usual with bonds and debentures.

• Peer-to-peer lending or peer-to-peer crowdfunding – funds can be arranged as loans. The lender receives interest payments for a fixed period of time and repayment of their loan amount in full.
• Reward-based crowdfunding – funding is arranged in return for goods or services. The value of the goods or services is determined by the borrower.
• Donation-based crowdfunding – funding is arranged for a charitable cause. Investors donate funds without expecting anything in return.
• Invoice trading – a type of alternative finance managed on an online portal which helps businesses borrow in advance of receiving money from their customers.
• Mini-bonds – offered on some equity-based crowdfunding portals. These are not regulated in the same way as equity-based crowdfunding and have a higher risk for the investor than equity.

Crowdfunding and peer-to-peer lending (covered in the next sub-section) are two innovative ways to get money into your business, but they are very different in some important aspects. For a business in the earliest stages of its life cycle, crowdfunding may appeal. You make your pitch to investors via a platform and those interested can contribute towards your proposed venture. Kickstarter is the world’s largest reward-based crowdfunder.

Investment crowdfunding is growing rapidly. UK examples are Seedrs and Crowdcube. If you do go down this route, you will need professional legal advice and to ensure your financial forecasts are in good shape. You can find out more about each of these in the Further reading section at the end of this week.