Funding a UK Business through Crowdfunding: A Simple Guide
Over the last several years, businesses throughout the UK have been blossoming. Thanks to a relatively stable economic landscape, a growing population, and the ability to reach consumers wherever they are make operating a successful business a feasible opportunity for many. However, most businesses, regardless of industry or tenure, face significant challenges revolving around finance. Without the right solution for infusing capital into a growing company, UK businesses find it difficult to keep the doors open and the lights on.
Crowdfunding can be one solution to this obstacle, so long as business owners recognise what it is, how to be successful in the process, and when alternatives may make better sense.
Understanding Crowdfunding for Business
In the simplest of terms, crowdfunding is the process of using resources from a pool of investors to help fund an idea, product, or business. Crowdfunding involves rallying the public around these business concepts, typically through an online portal, and encouraging them to invest in the company to help reach a specific goal. Investors are promised a reward or an equity stake in the business in exchange for their monetary contribution to the campaign. The business, then, utilises the funds raised to complete the project or task they told investors they would.
There are a handful of different crowdfunding options for businesses, including the following:
- Debt – investors lend money to companies and receive interest payments as the funds are repaid.
- Equity – the most common type, equity crowdfunding is a regulated exchange of money from investors for equity in a company.
- Donation – crowdfunding with a donation focus is typically used for social or non-profit work, and investors do not expect anything in return for their contribution.
- Reward – this type of crowdfunding promises investors a reward of some kind in exchange for investing in the business, product, or idea.
Debt and equity crowdfunding for businesses are the most often used for larger capital fundraising, although donation and reward campaigns may work well in some instances. For companies that want to lean on crowdfunding for their next round of financial investments, it’s necessary to know what platforms are available and how to make the most of the process.
Platforms and Processes
Specifically for equity crowdfunding initiatives, businesses in the UK can use Crowdcube, Seedrs, or Syndicate Room to build out their campaign and engage with investors. Each of these sites allows individual investors to participate in an equity crowdfunding scheme where, for as little as £10, investors gain access to business shares. Although all three platforms are regulated by the FCA, each has its own specialty for certain companies. For instance, Seedrs is best positioned for start-ups or seed-stage businesses.
With any crowdfunding platform, it is essential to know what components are required to ensure a successful campaign. Businesses should take the time to create or update their business plan, including financial projections both before and after investor funds come in. Additionally, companies need to have a clear and realistic valuation for the business if they want investors to contribute. Most importantly, though, crowdfunding requires a compelling story. Businesses that focus on their brand, the reason behind their products or services, and the reach investors will have by helping with funding have a much higher rate of success with crowdfunding than those who fail to share these details.
Alternatives to Crowdfunding
Although crowdfunding for business capital has become nearly mainstream in the last few years, companies may not always be in the best position to utilise one of these platforms. Crowdfunding can be expensive, given the sites that offer to connect investors to companies take a percentage of the campaign. Also, some companies may not want to give up equity or another type of reward in their fundraising efforts. When this is the case, alternatives to crowdfunding may be a better choice.
A finance specialist from Money Pug, a site used to compare short-term loans, states that small businesses may find more success in traditional lending avenues compared to crowdfunding. A successful crowdfunding campaign requires equal parts time and effort, but lending via a loan or other type of financing could result in easier, faster funding for growing businesses. It is necessary to understand the terms of a business or personal loan, including the cost, the repayment timeframe, and the restrictions around the use of the funds before going this route, however.
Businesses in the UK have several different options for fundraising the capital they need to expand, cover new inventory production, launch a new product or service, or gain more reach through marketing. Crowdfunding can be one path toward a financing solution for businesses that understand what’s necessary to be successful in the space.