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Crowdfunding

In the aftermath of the financial crisis, as banks have reduced lending and interest rates on traditional savings products have plummeted, we have witnessed the rise in prominence of crowdfunding as both a viable alternative source of finance for new businesses and an enticing prospect for investors.

Although the popularity of crowdfunding platforms has only risen recently, the concept is well established. Indeed, as far back as 1884, Joseph Pulitzer identified crowdfunding as an effective method of raising finance for the plinth on which the Statue of Liberty stands, sourcing investors through a newspaper advert in The New York World.

 Crowdfunding is a broad term which encompasses a number of forms, primarily:

Equity-based

Allows individuals to buy into the equity in the business, from as little as £10, with the returns realised through dividends or upon the eventual sale of the business. Businesses looking for funding apply to online platforms such as Seedrs and Crowdcube (UK), who list the opportunity and take responsibility for the process of issuing share certificates and handling voting rights etc.

 Debt-based

Works on the same basis as equity-based crowdfunding, businesses seeking funding offer investors the chance to lend cash in return for a fixed rate of interest. The online platforms have proved popular as they match investors who are looking for a higher rate of interest than those offered by banks, with businesses, particularly SMEs, who may be struggling to raise debt from banks.

 Others

Although most platforms are focussed on offering investors traditional debt or equity opportunities, there are also a number of niche crowdfunding websites emerging. These include those ranging from offering invoice discounting or factoring facilities, such as Platform Black, to philanthropic sites who provide opportunities to invest in community or goodwill projects and businesses.

 The consensus is that the amount of capital raised through crowdfunding will continue to grow in the coming years as lending from banks remains restricted. A growing appetite for higher returns than offered by banks, coupled with the tax incentives offered by the SEIS and EIS schemes in addition to the increasing regulation geared towards protecting investors, will fuel the continued growth of the industry. The UK’s innovation agency, NESTA, for example is already predicting that the UK crowdfunding industry will raise £14bn in 2016 which highlights the new possibilities that crowdfunding is providing for both projects in need of finance and their investors.

 

 

Date: 15th October, 2014
Author: Chris Lowry

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