Follow the crowd to raise finance
Finance Question: When the banks won’t lend you money where can you go for investment? Answer: One popular alternative funding option is crowdfunding which is growing at a rapid rate
Since the beginning of 2014 more than £40,000 has been raised every day through crowdfunding, and the growth of this alternative way to fund businesses shows no sign of slowing down.
The figures from The Crowdfunding Centre reveal that the UK market alone is worth about £1.5bn.
As traditional banks become more risk-averse, crowdfunding allows businesses to raise the money they need from a large number of potential investors. Thanks to social media companies can create a community of owners who often want to be involved in a particular brand, business or sector.
It is an different way to raise funds rather than using traditional methods such as trade credit, asset-backed finance, invoice discounting, angel investment or venture capital.
Manufacturing and retail are the two most popular industries currently using crowdfunding.
According to the UK Crowdfunding Association’s chair Julia Groves, about 44% of SMEs have heard of crowdfunding but so far only 9% have used it.
“Before finding your investors you need to work out exactly what your business pitch is. Can you get it down into a two minute video?” she says. “Then you need to choose a suitable crowdfunding platform and calculate an accurate valuation of your business. Finally, warm up family, friends and even customers who might want to become investors.”
SMEs must decide which crowdfunding platform is best suited to their needs.
- Debt crowdfunding known as peer to peer lending is similar to getting finance for a business or project through traditional means. Investors will expect a financial return
- Equity crowdfunding gives investors shares or a stake in the business in return for their financial investment. SMEs should give away as little equity as they can and ideally not more than 25%. Investors are usually experienced funders
- Reward crowdfunding is where an investor’s contribution is acknowledged with a reward, such a free entry to an event
“You can raise significant sums in a few days and pitching a project or business through crowdfunding can be a valuable form of marketing and you receive ideas on how to improve your business,” says Groves.
Crowdfunding is not for everyone. Businesses must set a target amount to generate, and if this isn’t reached the money is returned to the investors and the SME is left empty handed. Failed crowdfunding projects can also damage a business’s reputation.