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Guide to Crowdfunding

February 2016

In recent years, people have been forced to raise finance for their businesses in less conventional ways. The economic crisis has resulted in banks having much stricter requirements for approving loans.

If a bank loan is out of the question, where do you turn? There are a number of alternative routes to raising finance, the most popular of these methods are Peer-To-Peer Lending and Crowdfunding.

It allows entrepreneurs to talk with thousands – possibly millions – of potential investors. Despite still being a relatively new sector which is still finding its feet, its a really exciting new form of investing. However it can be quite complicated.

The UK Crowdfunding Association (CFA) has officially stated there are three different types: donation, debt, and equity.

Before contemplating crowdfunding, it is important to have a solid business plan in place. Getting people to invest is entirely dependent on your pitch. Before reading any further, we recommend taking a look at our Guide To Writing A Business Plan.

Donation Crowdfunding

This, as the name implies, is simply donating to a cause they believe in without expecting monetary gain. While donors don’t expect a return on their investment, they often receive rewards in the form of acknowledgements, regular updates, free gifts etc.

Debt Crowdfunding

With this form, investors receive their money back with interest. This is technically peer-to-peer lending, so if you’re interested in this, please read our blog on the subject. Returns are financial, but investors also have the satisfaction of knowing they they helped lift a project they believed in off the ground.

Equity Crowdfunding

This form allows investors to invest in an oppurtunity in exchange for equity. This type of crowdfunding is quite popular and can be very rewarding for both parties. Money is exchanged for a share in the business. Just as with other types of shares, if successful the value of the shares goes up. If not, the value goes down.

Crowdfunding is regulated, but not to the extent of traditional methods of raising finance. The FCA covers two of the three different types – debt-based and equity-based. For more information on how exactly it is regulated, please see the FCA web page on the subject. Remember, if you’re an investor, don’t be mistaken in thinking that because its regulated your money is safe. As with any investment, there is an element of risk.

The Conclusion

Crowdfunding has helped thousands upon thousands of businesses gain the funding they need and if you’re an entrepreneur, there’s no reason why it cannot do the same for you. Any business can get involved, but it seems to be more geared up towards creative projects. If you’re a filmmaker, musician, artist, designer etc, then there is a very good chance that it could be exactly what you’re looking for. If for example, you’re an insurance company are looking to raise some finance, this probably isn’t the route you want to take. First and foremost, crowdfunding enables everyday people to invest in projects they believe in, so bear this in mind when judging whether or not your business would benefit from crowdfunding.

Here are 5 of the most popular crowdfunding websites currently in operation. Take a look around, see what project others are pitching and gauge for yourself if you think crowdfunding will benefit you.

  1. http://www.gofundme.com/
  2. https://www.kickstarter.com/
  3. https://www.indiegogo.com/
  4. https://www.patreon.com/
  5. https://www.youcaring.com/

All crowdfunding websites offer different things, such as different processing fees so be sure to choose carefully, whether you’re an investor or an entrepreneur.

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