Crowdfunding: How Can It Help You?

Initially, crowdfunding was seen as a way for small businesses to obtain finance to fill the gap that the banks had left following the financial sector crash in 2008. Although still used for this purpose and very much a popular way for startups to obtain finance, it is now being used by larger organisations. With just shy of £100 million being invested by British crowdfunders in the first half of 2019 alone, organisations are starting to realise that not only is crowdfunding a great way to obtain finance but that the entire process acts as an incredible marketing campaign for their company. The UK alternative finance market continues to grow at a record pace with its total value in the UK in 2017 being £6.2b according to data compiled by the Cambridge Centre for Alternative Finance. This was compared to a total of £4.6b over the previous 12 months.

Types Of Crowdfunding

Broadly speaking there are four main types of crowdfunding;

·         Equity: In return for an investment, the investor is offered shares in the company which is raising money;

·         Peer 2 peer lending: A loan that is brokered between a borrower and a crowd of lenders;

·         Donation: The crowd contributes funds to finance a project for nothing in return;

·         Reward: In return for a contribution, a funder redeems a reward. Typically this means pre-selling a product or service i.e. a t-shirt, a CD or a meet and greet with the founders.

Crowdfunding Platforms

·         There are a plethora or crowdfunding platforms operating different models and it is vital that a company chooses the form of crowdfunding platform which suits their business needs.

·         Choice of platform can also be particularly important when it comes to peer to peer and equity crowdfunding. With the varying peer to peer platforms operating interest charges differently and equity platforms offering differing share structures, choosing a structure which will fit with the business plan and will not prohibit the business going forward is vital.

·         The different platforms will charge different fees for crowdfunding campaigns and this might be a percentage of the amount received by the company through the campaign, or a flat fee e.g. legal fees. In addition, different equity sites have different legal structures so it is vital that you take advice as regards the different platforms and the impact these could have on your business.

·         Another important consideration with the platform is the contribution they make to the outcome of the crowdfund. A platform with a good track record and a large member base will be able to leverage their network which should help attracting investment.

Running The Campaign

One of the key aspects to a successful crowdfund campaign is gathering momentum at the launch by having different investors lined up to invest immediately e.g. family and friends. This will then spike interest by other potential investors and hopefully encourage more to invest. A crowdfunding campaign involves a lot of work and it is therefore important to ensure that as many people as possible are pushing the campaign forward at every opportunity.

Can My Business Crowdfund?

In theory, any business can use crowdfunding as a means to raise finance. However, in practice crowdfunding is not for everyone and businesses should ensure that they explore all avenues of funding to ascertain what works best for them. Provided crowdfunding is structured correctly it can be a fantastic way not only to raise fundsbut also to generate PR and create increased awareness of your product or service

Harper Macleod are Scotland’s leading legal crowdfunding advisers advising both crowdfunding platforms and companies looking to raise funds.