Education

Three types of crowdfunding investment

13 Jun 2022

Most of us have come across crowdfunding campaigns on social media before. Crowdfunding enables organisations and individuals to raise funds by inviting a group of people to contribute small amounts, usually in return for equity or perks. Let's take a closer look at how it works, and explore some advantages and disadvantages.

Hands holding paper chain cut out of people to represent business crowdfunding investment

The first recorded crowdfunding venture was in 1997 when a British rock band funded their reunion tour using online donations from fans. This paved the way for the first dedicated crowdfunding platform, ArtistShare, launched in 2000.

In 2009, crowdfunding emerged as a significant funding source for entrepreneurs across various sectors, with Monzo being one of the most well-known UK crowdfunding success stories. 

According to Crowdcube, Monzo raised £1 million in one minute and 36 seconds in 2016 (it was called Mondo back then). Later, in 2018, it raised £20 million from 36,000 investors in just two days. Pretty impressive! 

Crowdfunding falls into three categories:

  1. Equity-based crowdfunding

Equity or investment-based crowdfunding is when investors invest capital in exchange for equity or shares in the business. 

Investors usually get equity in proportion to how much they invest. There's an amount of risk to the investor, as there's no set timeframe for receiving a return on investment. However, investors could make a better return if the company is successful. 

Equity crowdfunding could be suitable if you're a business owner who wants to raise money but can't get a business loan or doesn't want to agree to fixed repayments. On the other hand, you might decide you don't want to give up equity in your company.

2. Rewards-based crowdfunding

Rewards-based crowdfunding is when a company raises money on a crowdfunding platform by inviting people to donate for a reward or gesture. 

For instance, a restaurant might reward those who donate £50 with a three-course meal once the fundraising target has been reached and the project is off the ground. Or a textile designer might give a handmade garment to those who donate over £100. 

Anybody can donate to a rewards-based crowdfunding campaign, including friends and family. Because donations are usually small in value, you'd have to tell your business' story compellingly to get as many people as possible to contribute. 

Platforms usually charge a percentage and may also charge a processing fee. 

3. Loan-based crowdfunding

Loan-based crowdfunding also referred to as debt crowdfunding and peer-to-peer (P2P) lending, is when investors make small contributions of capital that the business pays back with interest. There's a growing pool of investors out there who are looking for their next project or company to invest in. 

Get peer-to-peer funding

Crowdfunding platforms typically keep the funds in a separate bank account until the funding target is reached. This helps ensure that investors get their money back if the project or business launch doesn't go ahead due to a lack of capital. 

As with every type of business funding, you are weighing the potential positives and drawbacks is essential. While crowdfunding works for some, it's not suitable for everyone. Here are some of the main advantages and disadvantages of crowdfunding:

Advantages of crowdfunding

  • Crowdfunding can be a quick way to raise finance

  • You might not have to pay any upfront fees

  • Raising funds through a crowdfunding platform can help attract publicity

  • Investors could become valuable ambassadors for your product or service 

  • You might receive helpful feedback on how to improve

  • It allows you to test the public's reaction to your concept

  • It can be a viable alternative for those not eligible for traditional business loans

  • Crowdfunding platforms take care of a lot of the admin

Disadvantages of crowdfunding

  • Not all businesses that apply to crowdfunding platforms are accepted

  • You'll have to spend time promoting your campaign and building up interest

  • The money will typically be returned to the investors if you don't reach your target 

  • A failed project could damage your business' reputation

  • Someone could steal your idea if you haven't patented or copyrighted it

  • Without planning, you could end up giving too much of the company to investors

Are you looking to crowdfund your business?

Whether you are a sole trader, a partnership, a limited company, or a start-up, various crowdfunding investments are available with a lender to suit every business need. 

Discovering the best crowdfunding option with the most competitive rates and the ideal lender can be time-consuming and complicated. However, through our award-winning, innovative and data-driven platform, Funding Cloud™, we can offer speed and certainty through a real-time, centralised and two-sided marketplace delivering instant decisions and firm offers from lenders. 

Register free today with Funding Cloud™ and connect your business to lenders and partners to facilitate fast, accurate, secure funding at scale. 

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