When you think of financing a business venture, crowdfunding probably isn’t the first thing on your mind. Why get £5 from 1,000 individuals when you can get the whole £5,000 from a real lender? Yet in recent years crowdfunding has become a popular option for companies to finance projects, with platforms like Kickstarter raising millions.
So, why are people putting their faith in “the masses” to provide funds? There are many different answers, but a big part of it is that crowdfunding is sometimes, in a way, “free” finance. Whilst crowdfunding usually requires that donators are given some recompense (e.g. a credit in a film or a copy when it’s released), crowdfunded donations don’t have to be paid back. In some ways crowdfunding is more of a “pre-payment”.
If you want to look at crowdfunding as an option, though, you need to be careful. Whilst it can be seen as a “holy grail” of finance, and the potential benefits can be huge, crowdfunding isn’t for everyone. There is a narrow range of successful projects. If you look at the top-funded projects on Kickstarter, you will notice that almost all the projects are technology or entertainment-based. Projects outside of those areas are unlikely to benefit from crowdfunding. Crowdfunding is also an area where you only hear about the successes. For every project that hits their goal, scores didn’t.
That doesn’t mean that there aren’t “traditional” finance options available from crowdfunding-style platforms, though. Peer-to-peer lending has been enjoying a similar boom in popularity recently. Unlike crowdfunding, peer-to-peer lending is definitely a “loan” – you are given finance and over time you pay it back, plus interest. However, unlike a normal loan, peer-to-peer finance may draw from a large pool of potential lenders, each contributing only part of the loan.
As such, you get the benefit of a wide range of investors, whilst also having the security that a codified finance agreement brings you. It’s clear that peer-to-peer has become more of an option for small businesses. For many businesses that don’t necessarily have wide-ranging public appeal, but are clearly solid investments which will be able to repay a loan, peer-to-peer allows them to have access to the finance they need.
Crowdfunding or peer-to-peer lending may both be viable options for your business to pursue funding through, but they’re not options you should pursue without making sure you’re properly prepared. Looking to a wide range of investors, whether public or private, comes with both benefits and risks that you need to consider when planning your finance. Consulting with professionals like ASC on whether crowdfunding or peer-to-peer are the right finance for you is vital before you make any big decisions – there are still plenty of other options!
