Should I use Crowdfunding to help set-up?
It used to be the case that when you started a business, or had an idea, you would need to go to a small number of investors that would invest a large amount of money. Crowdfunding has changed this. By using crowdfunding you can ask a large number of people, each for a small amount of money. This allows your business to be seen by many people and can also work as market research for you - if only a small number of people think you're worth investing in, then there's probably not a market out there for your business.
So what exactly is crowdfunding?
Crowdfunding is a method of raising capital through the efforts of friends, family, customers, and individual investors. This approach allows you to tap into the collective efforts of a large user base of individuals and leverage their networks for greater reach.
There are generally 4 types of funding that can be secured in this way: donation, reward, debt and equity.
This may not be relevant for all businesses, but it's still worth knowing about. This is similar to reward-based (which we'll look at next), but there are no rewards given out. This is most common in the case of not-for-profit businesses (also individuals and charities).
It will work best if there is a strong social feeling about the cause that the money is being raised for.
This is one of the most popular types of crowdfunding where people pledge money in turn for rewards (not equity). The reward offered can be anything from a grateful thank you on social media to a small gift such as a free pen or early access to your product/an invite to your launch party. The gift will need to be in relation to the size of the donation received. Once you have received the cash, you will need to make sure you can fulfil the rewards.
Reward-based crowdfunding is currently unregulated. If your goal isn't met, no one loses out and all the money pledged is returned. If your goal is met, you get the money, your funders get their rewards and any future financial backer can see that there is support for your idea.
This kind of funding is useful for anyone looking for funding.
This is similar to a bank loan, apart from the fact you are lending from a syndicate of different people. These people are often backed up by various corporations and government schemes. You will be charged interest on this loan.
With this type of funding, businesses will be assessed for credit-worthiness before being approved. Investors are then given the option to choose who they want to invest in and agree an appropriate interest rate. If the business ends up defaulting on the loan, the lender will lose out on the money, but as the loan is repaid the lender will make a profit due to the interest.
This type of funding is better suited to businesses that are already up and running and are just looking for more capital.
This involves multiple people investing in the business and receiving equity in the business in return. For example, you might put up 10% of the business in return for raising £90,000, with individual investors taking a very small percentage a 1% stake in the business would set an investor back £9,000, a 0.1% stake would be £900, and a 0.01% stake £90.
The main benefit of this is that there is no need to try and get rewards together. However, you need to remember that you are giving away a part of your business in doing this so you should think about the impact this will have by having multiple people having a part of your business.
This type of funding will be useful for anyone who would find it hard to give out rewards.
The type of funding you want to go for depends on your business and whether or not you want to give out rewards.
If you don't think that crowdfunding is right for your business then check out this post that gives information on other types of funding available.All references are correct at the time of writing, and should only be used as a guide. We recommend seeking professional advice before acting on the information in this article.
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