In 2017 an estimated £217 million was invested via crowdfunding platforms in the UK, and this number seems set to rise in the future.
Its popularity, however, doesn’t necessarily mean that it’s the right solution for you if you’re planning a new start-up or wish to expand or develop a new product line.
Before explaining the pros and cons of this revolutionary new way to raise funds, let’s look at the different types of crowdfunding.
What types of crowdfunding are there?
Equity crowdfunding is when you give a share of your company to your investors in return for their capital. Crowdcube and Seedrs are two examples of this kind of platform. Your investors could vary from the layperson who might invest as little as £10 to venture capital specialists with sizeable amounts.
Loan-based crowdfunding operates in a very similar way to a conventional loan from a financial institution. The most well-known platform for this kind of crowdfunding is Funding Circle which brings together lenders and borrowers. Loan amounts vary from £5,000 to £250,000 and are usually set at a fixed rate of interest over a loan term of 1, 3 or 5 years.
Reward-based crowdfunding is when potential investors receive some kind of compensation for providing funds. This could be as tangible as pre-purchase of the product, early access in its early stages of development or even something quirky like dinner with the businessowners.
What are the pros & cons of crowdfunding?
Crowdfunding has both advantages and disadvantages for both the businessowners and their investors.
One of the benefits of crowdfunding is that it gives your company access to the cash that it needs without the long-drawn-out application procedure that is necessary when applying for a bank loan. Sometimes, funding can be available in days – rather than weeks/months.
Another advantage of crowdfunding is that you can pitch an idea while it’s still in its planning stages to see if it catches the attention of the public and investors. This can give you a clear indication of whether your idea stands a chance of succeeding.
Angel investors – as experienced business people – are often able to give you the benefit of their expertise and can give feedback and advice which might take you in a whole new direction. Often, your investors will become your most loyal customers – giving you a ready market when the product eventually becomes available for sale.
One of the major drawbacks of equity crowdfunding is that you surrender a part of your business to your investors. You might resent someone else earning money from your idea. Even those who invest via reward-based crowdfunding might take a proprietary interest in your company. Their concern might seem flattering initially but not if it distracts you from developing your product. All the hype regarding the marketing of the product will also cost in terms of time and money.
Showcasing your idea will help to raise capital and boost pre-sales. However, you run the risk that someone else will steal your concept before you. Even if you have copyrighted or patented the idea, they might be able to get around this by making slight modifications.
Factors to consider before opting for crowdfunding
As well as balancing out the pros and cons of crowdfunding platforms and which type of crowdfunding appeals to you, there are other factors to consider.
Your success in crowdfunding depends on which sector you work in. Tech-related start-ups or firms (like the ones featured in The Silicon Review) have had the greatest success in receiving funds through these platforms
It’s impossible to predict what trends or ideas will catch the eye of investors. However, they are generally looking for an idea with the potential for future growth, a non-conventional approach to a product/service and/or a niche idea but which has a ready market (maybe because it’s an up-to-date adaptation of an older concept).
You must be able to devote the time and money to make your pitch to potential investors. It can be quirky, but it must be professional and detailed. If you have had any issues to overcome, you must be honest. Business angels have the experience to see if you’re hiding something and this type of behaviour won’t improve your chances of receiving the capital you need.
You must read the terms and conditions of the crowdfunding platform before wasting time on an application which will be turned down because you don’t fit their criteria of a borrower. Eligibility might depend on the type of company you have, your past credit history and/or how many years you have been running your business.
You should also be accurate in estimating how much money you need. Too little and you won’t be able to see your idea through to completion, for example. Don’t forget to check how the funding is paid. Some crowdfunding platforms won’t make you a partial payment if you haven’t been pledged the full amount by the deadline.
Like any kind of borrowing (whether personal or business-related) you should also factor in the cost of your borrowing. The fee structure of crowdfunding platforms varies. Some request an up-front fee, others take a percentage of the loan amount while others do both.
Other options to crowdfunding
After careful consideration, you may decide that crowdfunding isn’t the right way for you to raise the capital you need. In this case, you might have to think about alternatives such as a business loan or overdraft.
You should also investigate the possibility of governmental grants or loans especially if you have a start-up. Not only do they offer preferential rates of interest but some mentoring is often included as part of the package.
Cashfloat short term credit is your best option if you’re suffering from a temporary shortage of funds. With their fast and convenient application and online approval, you don’t have to waste any time. And as an FCA-approved and regulated firm, you know that they’re a lender you can trust.