Owning and operating a small business can be an exciting endeavor, but it comes with just as many challenges as it does opportunities. Businesses throughout the UK have the potential to serve millions of consumers, both locally and across the globe, with a variety of products and services that meet specific needs. However, without access to funding, many businesses ultimately fail. Finding the right financing can prove difficult, especially when traditional sources of funding are not readily available. Fortunately, for some businesses, crowdfunding is a relatively new and feasible funding avenue that can make all the difference in raising capital for a bevy of business needs.
What is Crowdfunding?
Crowdfunding is the process of bringing together individual investors, typically through an online platform, for the purpose of raising money for a specific goal or initiative. For businesses, crowdfunding can be used to reach investors they may not have access to otherwise, providing an opportunity to generate funding in a fast and transparent way. Crowdfunding, as it stands now, comes in four broad forms, each which serve different businesses depending on what they are trying to accomplish.
- Debt crowdfunding – under this structure, businesses are able to solicit funding from individual investors and in exchange, investors receive interest back on their contribution. This may also be called peer-to-peer lending.
- Equity crowdfunding – through equity crowdfunding, companies request funding from investors in exchange for offering up a small portion of ownership, or equity, in the company.
- Rewards crowdfunding – individuals contribute monetarily to a business in exchange for a reward, such as early access to a product or service.
- Donation crowdfunding – individuals provide funding for a charitable and social cause, without the anticipation of receiving anything back for their contribution.
Most businesses in the UK have focused their attention on debt and equity crowdfunding campaigns as a way to increase investment in the company. To date, these types of crowdfunding efforts have lead to hundreds of millions of dollars infused into UK businesses, and that is expected to increase over the next several years.
Although crowdfunding has gained traction as a viable fundraising tool for UK businesses, there are alternatives that may work best in certain scenarios. A finance expert from Money Pug, a site used to compare the best short-term loans, explains that while crowdfunding has its merits, there are circumstances where businesses need predictable funding. For instance, short-term loans or longer-term small business loans may offer more stability for companies, not only in the amount received but in the repayment to the lender. Crowdfunding may not provide this level of security for some companies.
In addition to traditional business loans, companies may not want to give up equity in the business as part of their fundraising efforts. Equity crowdfunding requires this, so for companies looking for less give than take, loans may be a better source of financing in both the short- and long-term.
Tips for Being Successful
Should a business decide that crowdfunding in one form or another is best suited for the company, specific steps need to be followed to promote success. First and foremost, recognising that not all crowdfunding sites work the same for each type of capital raise is important. For example, sites like Syndicate Room, Crowdcube, and Seedrs are all geared toward equity crowdfunding campaigns, while those such as Indiegogo and Kickstarter better serve businesses with rewards-based initiatives. Sites also differ in the fees charged for running crowdfunding campaigns, as well as the level of assistance provided to businesses to create successful fundraising efforts.
In addition to selecting the right platform, businesses need to prepare in advance for the launch of a campaign. This often requires compiling detailed information on what investors can expect as their return, how the capital infusion will benefit the company, and the current and future financials of the business. Some companies develop a team to help design and implement a crowdfunding campaign to help ensure success. Others may lean on current investors or partners to help promote an initiative to garner more interest over time. In either case, businesses must have a plan for a campaign before it is added to their selected platform.
Overall, crowdfunding can be a viable avenue for achieving fundraising goals for businesses small and large. However, any success in this arena requires paying close attention to detail, an understanding of what crowdfunding can and cannot do for a business, and the alternatives that may work better in certain circumstances for companies.