Crowdfunding

Crowdfunding is a well known but often misunderstood form of finance. UK crowdfunding includes many different crowdfunding sites, some of which specialise in crowdfunding for business — equity crowdfunding, business loans (in the form of peer-to-peer lending) and property crowdfunding.

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Crowdfunding

Crowdfunding UK

It isn't easy to give a straightforward crowdfunding definition because there are many different types. In its most simple terms, crowdfunding is a method of raising money by sourcing small amounts from many individuals (the 'crowd') rather than getting the total amount from one lender or investor.

This democratic way of raising cash has proved popular with a wide variety of businesses and can be used in a wide range of scenarios such as:

  • selling equity in a business

  • borrowing money for a business

  • selling preorders of a new product

  • raising money for a charitable cause

With this in mind, let's look at the three main categories within crowdfunding:

Donation and reward

Many people associate this kind of crowdfunding with charities and the arts, where people donate because they believe in the cause. An obvious example is charity fundraising, and people give money and get nothing in return because they’re happy to support the organisation.

Many crowdfunding websites offer a variation of this concept where a reward is provided for donating—for example, a business offering pre-orders for an innovative product months before it’s available. Donation and reward crowdfunding works well for some companies but is perhaps less relevant for others, depending on their industry.

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Peer-to-peer lending

With peer-to-peer lending (also known as P2P), the business borrows money from a collection of individual lenders and pays it back with interest. These crowdfunding sites act as the gatekeepers, so while they're not directly lending money to the business, they still have an underwriting team to assess risk for the individuals lending via the platform. For this reason, peer-to-peer lending is similar to a traditional unsecured business loan in terms of eligibility.

Some P2P lending platforms allow individual lenders to 'bid' for the project, which means the business might get a better interest rate than if they went direct to a single provider. It's also beneficial for the lenders because they have an alternative to more traditional investment channels and may make a higher return.

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Equity crowdfunding

Like peer-to-peer lending and mezzanine finance, investors take equity (or shares) in the business rather than repayments for a loan. This means that, despite operating at a higher risk (and no defined timeframe for getting their money back), investors have the chance of a better return if the company is a success. It also means they're investing in the future of a business rather than simply providing a short- or medium-term loan.

Equity crowdfunding can be a good option for businesses that want to raise money for growth but aren't eligible for a loan or don't want to take the risk of agreeing to a repayments schedule. Other firms won't want to give up equity in their company and prefer to raise money using debt instead.

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Property crowdfunding

Property crowdfunding takes the concept of peer-to-peer finance and combines it with property investment. Some variants allow individuals to invest in small shares of many different buy-to-let properties, while others are aimed at the commercial property finance market.

The latter are essentially peer-to-peer platforms that specialise in property development finance. In other words, property businesses that want to borrow money for a specific project can raise funds via individuals who wish to lend to property firms. One key difference is that property crowdfunding is typically secured, making sense as the sums of money involved tend to be higher.

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What is crowdfunding in business?

It might seem like there are dozens of differences between the various crowdfunding platforms. But comparing them is pretty straightforward:

Crowdfunding is a catch-all term for raising money via 'the crowd' — whether for a business, a charity, or a private individual.

Equity crowdfunding is the name for selling shares of your company to 'the crowd' — there's no money to pay back, but they'll be entitled to a share of future profits, and you'll sacrifice some control.

Peer-to-peer lending and marketplace lending are the names for loans lent by 'the crowd' — that means you'll have a schedule of repayments to stick to. You're effectively getting a business loan from several parties rather than one lender with these finance types.

Should I choose equity crowdfunding or peer-to-peer lending?

The simple way to compare the two is to ask yourself: do I want long-term investment or shorter-term funding? Selling equity means you don't have a timeframe to pay back a loan in return for sacrificing some control and some future profits. This can be an appealing option for new-start companies, but you'll have to make your business attractive to potential investors.

On the other hand, peer-to-peer lending may be easier to secure than a traditional business loan, but the disadvantages include potentially higher rates. Bear in mind that the appeal of P2P for investors is to get a higher rate of return than is currently available in forms of personal saving, like ISAs or bonds — so you might get a better deal elsewhere.

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