Crowd funding is worth a brief mention on its own, as it does not fit accurately into any of the previous categories, and depending on the model used, it could fit into all of them.
|Nature:||Crowd funding is a term that refers to a mechanism (usually carried on via a web site across the Internet) which allows for the power of mass-delivery of an idea or project to secure financial support or investment in smaller amounts from a large number of participants.|
Crowd funding is of three broad types. Simplest to understand is the so-called loyalty model, which does not involve investment at all. A business needing money for a specific project offers a non monetary return in exchange for small-scale sponsorship and donation. So a musical enterprise seeking capital to make its next commercial recording may offer free copies of the recording or free concert tickets in exchange for donations. (If that musical enterprise is a charity, there is no obstacle to these donations being gift-aided, provided the non monetary returns are of negligible value e.g. a pen or lapel badge or something equivalent.)
Secondly, some funding web sites offer to arrange unsecured lending. This is high-risk for the lenders, since they have no equity and no security, in the event that the borrower defaults. If your business borrows through such a medium, then, as with any other borrowing arrangement, you will have to repay the loans within the timeframe prescribed as well as servicing interest. Generally speaking, seeking of loan finance is a solution only where the project or business that wishes to borrow is going to generate substantial cash income as a result. And these need to be understood as term loans, rather than as overdrafts or as long-term carried-forward debt. Unsecured lending web sites (you will see these sometimes referred to as peer-to-peer lenders) are currently not regulated but the FCA is looking for a means to bring them within a framework of universal regulation.
The third model involves equity finance. Crowd funding services in this area fall into two broad sub-categories. There are those which genuinely look to involve a large amount of investors, who will invest small amounts towards overall lower value projects. The other sub-category seeks investment from high net worth individuals and others, who are able to commit much larger sums and help raise more substantial finance.
|Length:||The type of crowd funding sought will dictate the length that the finance is provided for which can range from one off non monetary returns to a longer term equity investment. The version that suits you depends on the moneys you want to raise.|
|Cost:||As above, the cost of raising finance differs with the type of crowd funding sought. The costs could include interest payments and a fee payable to the crowd funding website for their services, since these websites seldom if ever ask for lenders to pay towards the cost of their loans. With equity financing, however, you need to be aware that (a) large incoming shareholders will expect to have a significant say in your business; (b) all shareholders want to see what sort of exit is available (they are not intending to be long-term investors); and (c) there may be tax incentives (e.g. EIS or SEIS) for the shareholders if your business qualifies for these regimes; but the obligation to take the necessary steps to secure such qualification (and the associated cost) rests with you. Remember that again, the cost of raising the finance rests with you, not the investors.|
|Process:||Each type of crowd funding could entail a different process but the development of your project and the marketing of it will be key to engaging a mass audience and securing investment. Where the finance is given as a loan or equity investment, additional information may be requested by the lender/investors such as business plans and historical financial accounts.|
|Finance providers:||Various crowd funding websites exist and many operate in niche areas so it is worth while researching which sites are best to showcase your project in order to secure investment. A web site which offers equity crowd funding solutions must be FCA-regulated (or tied to a firm that already is) and never deal with a web site which is not protected by UK regulation.|