Crowdfunding – What is it and why is it changing the world of business?



Finding the right finance options for your business can be hard. Over the past few years the sources of traditional lending, including equity investments and bank loans, have dwindled. It means that only the most successful and secure of companies has access to these routes and has left many small companies without access to the funds they need to grow. However, crowdfunding can provide a solution to this, making it simpler to attract investment from a variety of sources.

What Is Crowdfunding?

It has got to the point where unless you have extensive assets it’s become practically impossible to secure a traditional bank loan. Crowdfunding has helped provide much-needed finance for a range of different businesses. It enables companies to raise the money they require from a number of different people. They each put in a little, which could add up to a significant investment. In the past, businesses would have attempted to look for one large source of investment, which can be a time-consuming and ineffective process.

Different Forms of Crowdfunding
There are four different types of crowdfunding available. Reward and donation crowdfunding was the initial means that businesses used. Through the internet, companies would advertise their idea and people would then donate money or receive a small reward for their investment, such as a discount or free gift. This type of crowdfunding would see people invest just because they wanted to and not to receive anything back.

Equity crowdfunding is where an investment is provided in return for equity in the business. This is more along the lines of a traditional investment scenario, where they are given shares or a percentage of the particular project’s profits. The more successful the business is, the more they will receive back. However, if the profits fall, they could also receive less back than they initially invested.

Peer-to-peer lending is a form of crowdfunding, but it works on similar principles to a traditional bank loan. However, rather than asking one bank for a large sum of money, businesses can attract a number of lenders who each give them a small amount towards their total. The lending process is established through a regulated website, reducing the risk to the lenders. Businesses can find companies and organisations willing to lend them the money, which can be paid back over a few years. Peer-to-peer lending is a faster and simpler process than using a bank, and there is more chance of the company being accepted. In most cases, you will still require around 12 to 18 months of trading history, but if you have this it’s a far easier route to the finance you require. Unlike equity crowdfunding, there is no need to give up any of the equity. The loan is repaid with interest in a similar way to repaying a bank loan.

If you think that crowdfunding could be beneficial to your business, then you can contact Allsquare and we will be happy to discuss your options and direct you towards possible providers.