Crowdfunding and Alternative Methods for Funding a UK Small Business
It seems as though new avenues for funding as becoming available to new and established businesses throughout the UK fairly consistently. However, one of the most notable over the last decade has been the introduction of crowdfunding. Businesses in nearly any industry and of any size may be able to utilise crowdfunding to help push the needle on fundraising goals, but the innovative process of connecting investors and companies is not right for every business. For those thinking about going down the path of crowdfunding, it is essential to understand what the process entails, what the alternatives are, and how to generate success in the realm of business financing for the both the immediate and long-term.
In 2011, the term crowdfunding was gaining traction as a way for businesses to access millions of potential investors in a single location. At its core, crowdfunding marries willing investors to needing businesses, for the purpose of making investments through an exchange platform. Sites like Seedrs, Crowdcube, and Syndicate Room have grown into business financing machines as they make this connection to investors easy, fast, and most importantly, transparent.
When a business launches a crowdfunding campaign, there are typically four distinct routes they can take to encourage or promote investment from the public at large. Debt crowdfunding, also known as peer-to-peer lending, is a popular choice for both businesses and investors. Through this category of financing, investors lend funds to a company based on a specific project or product, and in return, they receive interest on their contribution over time. In addition to debt crowdfunding, equity crowdfunding, regulated by the FCA, is a feasible solution for some companies.
Equity crowdfunding also connects investors to companies in need of a capital infusion, but investors instead receive a fraction of ownership or equity in the business in exchange for their contribution. For businesses with a charitable or social focus, donation-based crowdfunding is an option. Companies with a particular perk or reward to provide investors may follow the path of rewards crowdfunding as an alternative.
While crowdfunding may work for many different businesses, some suggest seeking out alternatives first. A finance specialist from Money Pug, a site used to compare the best short-term loans, recommends reviewing options for traditional financing before diving into crowdfunding as the end-all for capital fundraising. This is because traditional financing, such as invoice factoring, loans, and lines of credit offer more predictable results and manageable repayment over time. Crowdfunding may not offer the level of stability some businesses want or need in their funding efforts.
In addition to loans and other financing solutions, companies with high-growth potential may seek out funding through non-crowdfunding investors. Both venture capitalist groups and angel investors can offer far more expertise in growing a successful business alongside much large funding than crowdfunding campaigns. Although each may require significant sacrifice from the business by way of equity ownership, these additional resources and guidance can be invaluable to growth-focused businesses.
How to Be Successful with Financing Efforts
Whether a business determines that crowdfunding or more traditional financing mechanisms work best, companies must take the time to prepare before seeking out funding. On the crowdfunding side of the line, businesses should have a well-thought-out business plan, projections of finances before and after the fundraising, and potential use of the capital they raise through crowdfunding efforts. It is also essential to select the right platform for crowdfunding, as some are more suited to equity financing than rewards or debt crowdfunding initiatives.
Businesses seeking out alternative financing sources need to prepare for the application process, pulling together up-to-date company financial documentation as well as a written plan for the use of the funding. Lenders want to know that a company has the means to repay the financing over time, and investors outside of crowdfunding platforms need to feel comfortable they will receive their contributions back with a significant return.
Companies throughout the UK first need to understand which financing path is the best fit for their circumstances, and then follow through with a well-developed plan to get the funding they need from individual investors or traditional sources.