From humble beginnings in the USA, Crowdfunding is enjoying a meteoric rise in growth and popularity. Projections are that, whilst still relatively small in overall funding terms, the sector is set to enjoy hockey stick growth in the future. But what is Crowdfunding?
Crowdfunding is a concept whereby individuals (the crowd) collectively pool their resources – usually via the Internet – to support businesses or social enterprises. Crowdfunding is used in support of a wide variety of activities, including: business growth, start-ups, support of musicians by fans, disaster relief, scientific research etc etc.
It is basically a way of raising finance by asking a large number of people each for a small amount of money. Traditionally, financing a business, project or venture involved asking a small number of people for large sums of money. Crowdfunding switches this idea around, using the internet to talk to thousands – if not millions – of potential funders.
Typically, those seeking funds will set up a profile of their project on a Crowdfunding website, of which there are an increasing number many specialising in various sectors, and the crowd will then decide whether to back the idea or not.
There are three different types of crowdfunding: donation, debt and equity…
Investors effectively provide loans and therefore receive their money back with interest. Also called peer-to-peer lending, it allows for the lending of money while bypassing traditional lenders such as banks.
Interestingly, the government has recently provided a significant amount of money to one well known Debt peer-to-peer lender to pass on to their customers.
At the present time, it tends to be only available for established businesses although there are now a large number of specialist funders specialising in different parts of the market eg asset-backed lending, invoice discounting, bridging finance, personal lending etc.
Money is exchanged by individuals for a small stake in a business (including start-up), project or venture. As with other types of shares, apart from community shares, if it is successful the value goes up. If not, the value goes down. There have been issues and concerns over FCA compliance, but this is gradually being addressed.
As with Debt crowdfunders, there are several specialists which concentrate on different parts of the market including start-up’s, established and growth businesses.
People invest simply because they believe in the cause. Rewards can be offered such as acknowledgements on an album cover, tickets to an event, free gifts etc. Donors typically have a social or personal motivation for putting their money in and expect nothing back, except perhaps to feel good about helping the project.
Crowdfunding is a fascinating concept which has essentially been created by the need to fill the funding gap following the credit crunch. Alternative finance business lending, of which crowdfunding is a big part, though still less than 3% of gross lending grew by 75% to £1.26bn in 2015 and this trend is forecast to continue. Watch this space!
This guest blog was provided by Peter Beresford, Director of RedSky Funding Solutions
At RedSky we provide business support to SME business owners and directors who are serious about growing and developing their business.
The RedSky team are highly professional specialists, each with a wealth of industry knowledge and experience in their area of expertise. We work with a range of businesses, from start-ups, which want to move their ideas from paper into practice to established companies wishing to evolve, or move to the next level of growth.
RedSky business advisors offer full business support finance for you and your business through strategic business planning, financial planning, business grants and marketing support.
For more information, go to www.red-sky.co.uk