The power of the crowd

Britain’s crowdfunding sector has come of age and now sees itself as a serious rival to the banking industry – if you’re a small business looking for finance, crowdfunding is a genuinely viable alternative to traditional sources of cash.

The introduction of formal regulation in the sector in April has given online crowdfunding platforms greater legitimacy for both investors and companies raising money, and from next summer many investments made on the platforms will become eligible investments for tax-free individual savings accounts. That will broaden the appeal for investors even further, increasing the funds available to businesses looking for finance.

The principle of crowdfunding is well-suited to small business funding. The business sets out its pitch for funding on the platform, based on its business model and the individuals involved. Investors then weigh up the merits of the pitch and decide whether or not to offer the cash. The reach of the internet enables businesses to reach sufficient numbers of investors to raise the funds they need, even though many individuals will only invest very small sums.

While several crowdfunding platforms cater for businesses hoping that investors will hand over cash as a donation – possibly in return for perks such as product discounts or free gifts – the more serious options fall into two categories: loan-based platforms enable small businesses to borrow from investors, with the repayment terms defined at the outset; equity-based platforms enable small businesses to offer investors a share of the company which may or may not have value later on, depending on whether the venture succeeds.

What are my crowdfunding options

In the first category, platforms such as Funding Circle, Rebuildingsociety.com and Thin Cats have already enabled small businesses to borrow millions of pounds from investors, often at lower interest rates than the banks would offer, even assuming they were willing to lend.

In the case of equity-based crowdfunding, meanwhile, the platforms are less established, but sites including Seedrs and Crowdcube are beginning to raise serious amounts for small businesses willing to sell investors shares in the company. The different models will suit different types of business. Those with established cashflows may prefer the debt platforms – though investors must be repaid with interest each month, the founders don’t have to give away any of their business.

The equity-based sites, meanwhile, often cater to start-up businesses that can’t be sure of sticking to a repayment schedule – investors backing these companies are speculators, taking a punt that the company will one day make it big and that their shares will have value.

It’s worth checking out all the different crowdfunding sites. In addition to the big names, specialist sites operate in particular sectors – Abundance Generation, for example, works with sustainable energy businesses, while Unbound and ShareIn target the publishing and health sectors respectively.

The tax advantages of crowdfunding are also worth stressing to investors. In addition to the individual savings account concession, small businesses raising money via equity-based platforms can qualify for the seed enterprise investment scheme (Seis), a Government initiative that offers investors hugely generous tax breaks in return for risking their money.

This article from David Prosser details where to look for grants and support when starting up a business.

David Prosser is a freelance journalist who specialises in writing about business, entrepreneurs, personal finance, property and investment. David has worked across all the major broadsheets including The Observer, the Daily and Sunday Express and, most recently, The Independent, where he spent several years as Business Editor managing the newspaper’s business coverage. David will be writing four blog posts and this is the second. David’s blogs will appear on Mondays.  

David Prosser is a former business editor of The Independent .