As a result of the recent economic downturn and uncertainty surrounding Brexit, banks are less likely to take risks and lend money to small businesses. This coupled with interest rates being at an all time low, Crowdfunding has become more and more popular with businesses that are looking to raise capital. In fact, UK’s alternative finance market is now worth over £3.2bn with crowdfunding “by far the biggest success story” of the industry to date.
Crowdfunding is a way of raising finance by asking a large number of people for a small amount of money and over recent years we've seen a variety of different businesses receive investment through Crowdfunding. From a Foreign Exchange App to countless start up brewery businesses to an online Estate Agents, it's clear that crowdfunding is accessible for all business types. Funding platforms can also be used for established businesses wishing to expand, invest in infrastructure or machinery to bolster growth.
In its comparative infancy to traditional funding sources, their are a variety of different models currently present in the crowdfunding market but we would recommend that our clients only use set ups that have been authorised and regulated by the FCA.
If you are seeking investment for your business via Crowdfunding, there are many benefits and a variety of funding opportunities however, as with all business decisions it's important to be aware of all the facts and risks involved.
What are the benefits?
- You can apply for crowdfunding for any purpose, be it to sustain cash flow, for investment in a particular project such as new product development or investment in business systems to improve infrastructure
- It can be a fast way to raise finance with no upfront fees. This is good for businesses looking to generate cash quickly and on a large scale without approaching a bank or other financial institution
- Lending is usually secured against company assets only therefore there is normally no requirement for personal guarantees
- Loans are normally no more than 5 years
- It’s free PR. The momentum created by successful crowdfunding campaigns can attract potential investment from traditional channels and attention from media outlets
- Crowdfunding platforms presents minimal risk to the company being invested in, the majority of the risk lies with the investor
What are the risks?
- Take up is not guaranteed. The application process is not necessarily any easier than the more traditional ways of raising finance and unfortunately not all projects that apply to crowdfunding platforms are accepted
- If the project fails there is the risk of damaging the reputation of your business and people who have pledged money to you
- Once you have identified your chosen funding platform, you may need to invest significant resource and effort to build interest in your campaign before the project launches
How should businesses protect themselves?
Strategic Planning. Those who are utilising the platform to obtain a loan should plan their finances just as they would if they were receiving a loan from a bank. Failure to pay back the required amount on a loan may result in financial penalties which would offset the benefits gained from using the platform. Businesses should therefore be vigilant when entering an agreement, ensuring they know exactly the terms of payment they are agreeing to.
If you are interested in finding out more about Crowdfunding or any other aspect of our Finance service, please contact BCR Associates on 03330 433233.