In this tough economic climate, when a business needs additional finance, traditional bank funding might not always be available. As bank funding has become harder to come by, businesses are turning to alternative forms of finance. But whatever funding options you choose, it is important to match your business need to the type of finance on offer.
There has been a huge increase in the use of crowdfunding as a method of raising money for a particular business project. According to the Financial Conduct Authority (FCA), £28m was raised last year through crowdfunding, representing an increase of around 600% on the previous year. Further to this, recent reports indicate that the UK economy has received a boost of more than £9m in the past three months from crowdfunding.
Crowdfunding can play an important role in raising finance for a variety of businesses but in particular for early stage companies and established businesses launching new projects.
Crowdfunding is usually done via the internet and social media to seek lots of small investments from a large number of people, thus receiving reasonable chunk of cash. The reason for the popularity among businesses is clear – available cash – but for investors, they can lower their risks by parting with a larger sum which they spread around smaller investment opportunities. As part of the crowdfunding market, some businesses will offer its investors a share in the business other than just a return by way of interest.
The FCA has recently confirmed new rules governing crowdfunding to tighten regulation over this burgeoning market. These rules will require prospective investors to be either “sophisticated” investors (i.e. an investor who regularly invests in companies), or for there to be a cap on the investment of 10% of the investor’s portfolio.
Whether an investor or a business seeking funding, crowdfunding isn’t necessarily an easy fix or return. There are still risks on both sides and everyone needs to be clear on the detailed terms agreed – after all, it is still a financial arrangement which the company will want to rely on and the investor will want to be able to enforce. Clear terms and condition of the investment should therefore be agreed well in advance of any money being handed over.