Crowdfunding

Crowdfunding

Investors give money to causes without it being repaid.

This type of crowdfunding is most familiar due to its uses raising money for charity and disadvantaged people, although many businesses have also made use of it.

A genuine belief in the cause is necessary to support a case requesting funds in this manner, since the investment is not earned back. Despite this, it is a great way to support communities, locally or internationally. It can also prove to be very effective advertising for a blossoming company. Furthermore, the level of funding raised can really help to gauge the depth of public support for your cause, since it will show whether people are really interested in it doing well.

With experience and knowledge of the system, acorn.finance can help you to secure funding for your cause – be it charitable or business – on a win win basis, so that you can make the most of what crowdfunding has to offer.

Investors give money to causes in return for rewards.

Although very similar to donation-based crowdfunding, reward-based crowdfunding is likely to receive greater investment because of the potential for something tangible or financial in return.

If the rewards are suitably targeted towards the type of backer you wish to attract, then the funding can be greatly increased. See the story of the company “Tossed” on Seedrs (Tossed). Although Seedrs is not a reward-based platform, Tossed offered suitable rewards as part of their campaign and improved the amount they raised. 

Be careful to choose rewards sensibly so that you don’t price them too highly. Check the average investment on the platform you’re using so you know what to aim for. Contact acorn.finance to find out whether we can help you to raise the money you need through the most appropriate platform.

Investors lend money to causes, and as such expect it to be repaid with interest.

Unlike the previous two types of crowdfunding, with loan-based crowdfunding – in principal – you are eventually repaid your investment. This can be a great way to get quick funding for a business start up or expansion, especially if the banks have refused to lend, and the use of the internet means that backing can come from across the world, so you’ll end up with widespread support. The fact that individuals have invested their own money in your project means they have a vested interest in its success. As such, they are more likely to buy its good/services and spread the word of its existence.  

Funding Circle is a platform which operates in the UK, USA, Germany and the Netherlands, and has lent over £2.5 billion to over 25,000 businesses. One example of its work is the story of Rufus Grantham’s loan application to refurbish a derelict pub. He wanted to turn it into a popular bar. Funding Circle managed to secure him £104,000 from hundreds of investors so he could achieve his ambition.

Acorn.finance has worked with many people and companies to secure them a loan through crowdfunding or peer-to-peer investment (P2P). With P2P worth over 70% of the whole crowdfunding market ($25 Billion in 2015), and an estimated 2,000 platforms available worldwide, acorn.finance’s expertise could be a vital asset to your campaign. We will ensure that it is targeted, meaningful and launched through the best site for you.

There are also examples of loan-based crowdfunding where investors are choosing to fund businesses in the developing world. Zidisha enables poorer people in less affluent countries to secure capital to help start companies. The hope is that they will eventually be in a position to repay the investment. See our other blog articles for some case studies of Zidisha’s work.

Investors buy shares in the company with their investment.

The final type of crowdfunding rewards investors with shares in the company wanting funding. Much like with loan-based crowdfunding, investors are more likely to care about the success of the project. They will possibly look to advertise it to potential customers – even if they just tell their friends, it’s worth it. Furthermore, having a base of engaged shareholders means you are likely to receive useful collective feedback about the business.

All types of crowdfunding come with risks, although some are riskier than others. For starters, while the last two types (loan and investment) are regulated by the Financial Conduct Authority (FCA), the first two types (donation and reward) are not. This means that you cannot be sure of the legitimacy of the project or the platform. It is also possible that the project you choose to support will not succeed. In this case you will lose your investment and not receive any rewards to which you were entitled. This is particularly concerning when you consider that crowdfunding is not supported by the Financial Services Compensation Scheme (FSCS).

There are further risks with investment-based crowdfunding, which should be considered. If more shares are issued in subsequent rounds of funding for the company, the shares you own may be diluted. In most situations, there is also no secondary market, so your shares cannot be sold on if they begin to lose their value quickly. You’ll be tied in for the long run.

Despite the risks, which must be considered very carefully before investing, crowdfunding remains a very good way to build funding, grow the support of the target market and/or a stable of helpful shareholders, or invest your money in companies destined to flourish. With acorn.finance on your business’ side as you enter the world of crowdfunding, it will seem significantly less daunting. Raising money from the public over the internet is a fantastic, modern venture. Contact us so that you can be part of its success.

Crowdfunding – How to invest in the future

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.

Popular Platforms

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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