In the last few years, a new form of funding has emerged and proven popular with both companies and investors. It’s called crowdfunding.
Put simply crowdfunding is a way of being part of a much bigger product, service or start-up company without having to put too much money upfront yourself – as there is a ‘crowd’ of other similarly-minded people all helping to fund the same project.
It’s no surprise crowdfunding has caught the eye of so many investors. With the financial crash and recession in 2008, came a restriction on bank lending, so businesses needed to find alternative ways of funding new product development or new ideas to diversify. For consumers, the recession brought low bank rates, therefore, low rates on traditional savings and ISAs. All of this has coincided with the rise of the internet and trust incredible websites that offered a different way of investing with higher potential returns.
The figures are eye-watering. In 2015 the global investments in crowdfunding schemes was over $34bn and in the UK it was £3.2bn – up 84% on 2014.
There are four main types and these centre around the way your money is used and what you get in return:
- Donation-based crowdfunding: you give money to enterprises or organisations whose activities you want to support.
- Pre-payment or rewards-based crowdfunding: in return for your investment you get a reward, service or product.
- Loan-based crowdfunding: also known as ‘peer-to-peer lending’, this is where you lend money in return for interest payments and a repayment of capital over time.
- Investment-based crowdfunding: you invest directly or indirectly in new or established businesses by buying investments such as shares.
There are many platforms and some specialise in particular types of funding or types of business venture, from start-ups, to finance, to entertainment and social or environmental projects. Popular platforms you may have heard of and may be worth checking out include: Crowdfunder, Lendinvest, Funding Circle, Crowdcube and Seedrs. This is just a small snapshot of the broad range of providers out there, this is why so many clients use a broker like acorn.finance to help assess the offerings and go directly to the ideal platform.
Crowdfunding can be an exciting way to be part of something that you could never be part of on your own. You can contribute to a fledgling business venture and watch it develop, reaping the rewards as it grows and succeeds.
It’s also a useful way to invest in ventures that High Street banks or other lenders are not prepared to invest in, such as a new product or service. For some investors it’s a way of being part of a local project to make the community a better place.
There are many ventures and opportunities out there so it’s important to research the market and know what you’re getting in to. The rewards can be high, but there are risks. As the saying goes, there’s no such thing as a free lunch.
Risk and Reward
Assess the level of risk based on the size of your investment and undertake due diligence on the platform and the investment opportunity. You should also assess if the investment you make is likely to give you the short or long term returns or rewards that you are looking for. Bear in mind you won’t be part of the FCA’s Financial Compensation Scheme as you are with bank or building society savings accounts.
This form of lending is generally unsecured, so make sure there’s a way of getting your money back and the rewards match your investment. For example PayPal no longer protects crowdfunding investment payments.
In the interest of protecting consumers and promoting the growth of crowdfunding, the leading platforms feel it is important that there be a common set of standards to which everyone adheres. Crowdfunding platforms can follow a code of practice set up by the UK Crowdfunding Association – look out for their logo to ensure they follow this code.
How Does Peer-to-Peer Compare?
Crowdfunding and peer-to-peer lending are often mentioned in the same sentence, but they are quite different. With peer-to-peer lending, investors lend to businesses (or people) and receive interest on their investment over the term of the loan, and get their initial investment back. There are also some tax advantages in that investments can be made tax-free as part of an ISA. With peer-to-peer investment you can also sell your investment on to someone else during the term of the investment (but your return will be proportionately reduced), whereas most crowdfunding investments are ‘illiquid’ so can’t be sold on as such.
Funding the Future
As the crowdfunding process has been so successful, it is coming under the scrutiny of regulators and larger investors looking for evidence of returns. So as the market matures, there could be some changes in the way it is run. However, if it can overcome these challenges and provide a consistent track record and safeguard investors’ money, the future looks very bright indeed. As long as savings rates are low, consumers will look for better opportunities for their money, and businesses will be looking to raise money for development when the bank says no.
For further information give us a call to discuss your investment or business opportunity. If you’re unsure of this form of investment and want assistance with the options available to you then it’s important to use a broker who understands this sector. If you’re a business looking to raise funds for a new product or service, we can help with choosing the right platform and getting your pitch to right to generate interest in your project and attract investors.
You can also check the Crowd Funding Association’s website at www.ukcfa.org.uk
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