What is Crowdfunding? A Guide for UK Small Businesses

What is Crowdfunding?

Crowdfunding is the process of raising capital by collecting small investments or donations from a large group of people. This typically happens through online platforms such as Crowdcube, Seedrs, Kickstarter or Indiegogo.

The concept is simple: individuals who believe in your business or project contribute money, and in return they may receive a reward, equity, repayment with interest, or simply the satisfaction of helping. Unlike a traditional business loan, which involves a single lender, crowdfunding spreads financial risk and support across many backers.

How Does Crowdfunding Work?

Businesses usually start by creating a campaign on a platform, outlining the funding target, the purpose of the raise, and what backers will receive in exchange. A compelling pitch is critical - often including videos, financial projections, and product prototypes.

Once launched, the campaign must be promoted to potential backers. Support can come from personal networks, social media followers, or the platform’s existing community of investors. If the target is reached, the funds are transferred (minus platform fees). Some platforms operate on an “all or nothing” model, meaning you only receive the funds if the goal is met. Others allow partial completion, though this depends on the provider.

Types of Crowdfunding

In the UK, crowdfunding falls into four main categories.

Reward-based crowdfunding allows supporters to receive a product, service, or experience in exchange for their contribution. For example, a technology startup might offer early access to a new device. This model is especially popular for creative projects and product launches.

Equity crowdfunding offers investors shares in the company in return for their money. This form is regulated by the Financial Conduct Authority (FCA), ensuring investor protection and disclosure requirements. Platforms like Crowdcube and Seedrs specialise in equity crowdfunding.

Loan-based crowdfunding, also known as peer-to-peer (P2P) or debt crowdfunding, involves individuals lending money to a business with the expectation of repayment plus interest. 

Donation-based crowdfunding is often used for charitable or social causes. In this model, backers donate without expecting any financial or material return.

Benefits of Crowdfunding

Crowdfunding can provide several advantages to SMEs. It creates access to capital without traditional bank lending, while at the same time generating publicity and building brand awareness. Campaigns often act as a form of market validation: if people are willing to support your idea with their money, it’s a strong sign of demand.

Another benefit is community engagement. Backers can evolve into long-term supporters or customers, providing ongoing advocacy. In some cases, businesses that succeed in crowdfunding also attract the attention of larger investors, venture capital funds, or government schemes such as the British Business Bank’s Enterprise Investment Scheme.

Risks and Considerations

Crowdfunding also comes with challenges. Running a campaign is time-intensive, requiring continuous marketing and communication with backers. There are financial costs as well, since platforms typically charge between 5–10% of the total raised.

Intellectual property risk is another factor - publicly sharing an idea before securing patents or trademarks may expose it to competitors. Additionally, campaigns that fail to meet their target can harm reputation and credibility.

Equity and debt crowdfunding require compliance with FCA rules, including risk warnings and transparent investor information. Businesses that fail to comply can face penalties. Tax treatment also varies by model: income raised via rewards may be treated as revenue, while equity and loan-based investments follow different rules, so professional advice is essential.

Is Crowdfunding Right for Your Business?

Crowdfunding can be particularly effective for businesses with consumer-facing products, strong branding, and a compelling story. It suits startups that want to test demand, build an audience, and raise awareness as well as funding.

However, businesses in need of fast, reliable access to larger sums of money may find traditional finance more appropriate. At Funding Options by Tide, we help UK SMEs compare finance from over 85 lenders, including unsecured business loans, secured business loans, invoice factoring, revolving credit facilities, and asset finance. To date, we’ve supported more than 17,000 businesses and facilitated over £1 billion in funding.

Crowdfunding is no longer a niche form of finance - it is now a mainstream tool for UK businesses seeking capital. It provides more than funding: it offers validation, exposure, and community engagement. Yet it requires preparation, compliance, and careful management to succeed.

For small businesses, the decision is not whether crowdfunding is “good or bad,” but whether it is the right fit at a given stage of growth. Exploring crowdfunding alongside other finance options ensures a more resilient approach to business funding.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

Itʼs important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicantsʼ circumstances and creditworthiness. Funding Options will receive a commission or finderʼs fee for effecting such finance introductions.