What is crowdfunding?
Crowdfunding is a relatively new method of raising money. Combined with peer-to-peer lending, this industry is collectively known as alternative finance but many people simply refer to it as crowdfunding to avoid confusion.
It allows businesses and individuals to raise money through the internet platforms from a large group of people, avoiding traditional lenders in the process. People usually turn to crowdfunding so they can launch or expand their business but the funds can be used for many purposes.
Will I have heard of any of these platforms?
You probably have. Kickstarter, Crowdcube and Indiegogo get a lot of media attention but there are literally hundreds of platforms across the globe with more appearing each week. Whilst most cater to all industries there are some which specialise in certain sectors such as property, entertainment and technology.
Are there different types of crowdfunding?
Yes there are! Four main types, to be exact.
- Equity crowdfunding – this is where entrepreneurs and business owners offer shares in their business in return for investment. Investments like this are considered to be risky but the financial upsides can be far greater than other forms of crowdfunding.
- Debt crowdfunding – also known as peer-to-peer lending, this is the largest part of the market. Investors lend money to business owners who then pay the money back with interest on top over a pre-determined period of time. Though the returns to investors could be lower than equity crowdfunding, peer-to-peer lending is largely seen as a safer investment.
- Reward crowdfunding – this form of crowdfunding sees little to no financial return for investors, who are known as backers in this sector of the market. Campaigns that appear on reward-based platforms tend to be passion projects from creatives and usually ask for much smaller amounts of money than those found on equity and debt platforms. Backers will receive a gift in return for their donation which will typically increase in quality and/or quantity the more money an individual pledges.
- Charity crowdfunding – this is where campaigners and backers rally together to raise money for a good cause. These campaigns are often set up to help those affected by natural disasters or other tragedies but there are numerous causes that the money can go towards.
Who can get involved with crowdfunding?
Equity and debt crowdfunding are usually targeted at professional investors. Both sectors carry risk to capital and some platforms impose a minimum investment that is often thousands of pounds in an effort to ensure only sophisticated and high net-worth individuals can invest. Though the general public is allowed to get involved in many of these campaigns they should make sure they read and understand the risks before committing any capital.
Reward and charity crowdfunding campaigns tend not to have any restrictions and the general public are often actively encouraged to invest in these projects through social media, but we still recommend that you do your research before deciding whether or not to part with your money.
What is the crowdfunding market like?
An industry study released in 2015 revealed that the global total for fundraising topped $34 billion that year, $25 billion of which was in the peer-to-peer sector. This was more than double the amount raised in 2014 and the market is expected to keep on growing for the foreseeable future.
A report commissioned by the World Bank stated that the global industry value could exceed $90 billion by 2025.
Why should I consider crowdfunding instead of using a traditional lender?
Simply because you have more of a chance of getting the money you need. According to a report conducted by Funding Options, SMEs (small to medium sized enterprises) are more than twice as likely to receive funding from an alternative finance as they are from the banks.
82% of all small businesses that applied for funding through a crowdfunding or peer-to-peer platform were successful, whereas only 36% of applicants were accepted by traditional lenders.
Can I start a crowdfunding campaign?
Yes you can but it’s a lot of hard work. That’s exactly why we provide our readers with a lot of free advice. Please visit our Tips and Guides page to find out more.