Crowdfunding: What is it and is it worth it?

If you’ve been looking into funding a new business venture then it is almost guaranteed that you will have come across the idea of crowdfunding. On first appearance this can often be a very attractive proposal, but what exactly is it and what are the draw backs to using crowdfunding for business projects? Let’s explore this further:

Introduction to Crowdfunding

Put very simply, crowdfunding is a way to generate the finance you need for your new venture by asking members of the public to contribute their cash towards it. While this may sound like a rather on-trend type of financing, a similar business model dates back to 17th century book printing.

This model has adapted rather significantly as, instead of asking a small local community, typically crowdfunding is done through online websites that can drum up thousands or even millions of funders.

What’s in it for the Funder?

Obviously the funders are going to want something in return for their contribution, but what this is will depend on your business. Currently there are three different types of crowdfunding, these are:

1. Donation – people invest as they believe in the cause, often there are rewards such as acknowledgements, gifts, discounts etc. Often investors will donate money as they feel a social or personal motivation behind the project.
2. Debt – investors will place their money in the project with the understanding that it will be repaid with interest. This is also called peer-to-peer lending and returns on the investment are subject to the project’s success.
3. Equity – this is the most common type of crowdsourcing for businesses as people invest in exchange for equity, similar to selling shares. Investors will purchase a stake in the project and the value of that equity will go up or down depending on the venture’s success.

Choosing the way in which you lay out your crowdfunding will be largely dependent on the venture you have in mind. Some projects lend themselves towards donation or debt much better than others, while equity can be much more successful.

Is crowdfunding worth it?

Unfortunately the answer is both yes and no. We’ll explain this further…

Some projects lend themselves to crowdfunding, while others will simply not drum up the support they require. In addition to this, it can be extremely difficult to raise large amounts of capital – as many crowdfunding websites start contributions at £5. If you’re looking to raise thousands or even millions then this will involve a huge amount of people and an elaborate sales pitch to attract investors.

That said, there are pathways that allow you to avoid having to use public crowdfunding websites and instead put you directly in touch with serious investors. This is a great option if the project you have in mind is property or development related, as these gain much greater traction in specialist circles.

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What responsibilities does the Borrower have?

Typically, crowdsourced funds are subject to income tax as they aren’t classed as gifts, but sales. If you have crowdsourced using a debt or equity model then the Borrower has a responsibility to ensure that the Funders are getting something in return. While this isn’t something you can guarantee, it is expected and can lose you a lot of supporters if you fail to produce results.

Crowdfunding has been regulated since 2012 under the FCA, covering both debt-based and investment-based lending. This regulation focuses on the product that’s being offered rather than the risk profile of the business that’s being invested in, giving a huge amount of leniency for small start-up businesses.

Need alternative finance?

At Pure Commercial Finance we have a huge range of investors who are looking for businesses to invest in. With varying amounts of alternative finance available from a core base of investors, we can help you to broker the best funding solution for your needs, call us today on 02920 766 565 to find out more.