Making Money - May 2018

ADVICE

CROWDFUNDING

YOUR START-UP

Paul Clapham assesses the pros and cons

of using increasingly popular online finance

platforms

C

rowdfunding is a way of

raising finance by asking

a large number of people

each for a small amount of

money.

Traditionally, financing a business,

project or venture involved asking a

few people (ie banks) for large sums

of money. Crowdfunding switches

this idea around, using the internet to

talk to thousands - if not millions - of

potential funders.

Typically, those seeking funds

will set up a profile of their project

on a website. They can then use

social media, alongside traditional

networks of friends, family and work

acquaintances, to raise money. 

CUTTING OUT

THE MIDDLEMAN

Nicola Horlick, the controversial

fund manager who was dubbed

‘Superwoman’ in the nineties for

juggling a career and family, has said

it’s a “no brainer” that crowdfunding

has become so mainstream, given

that banks are not lending to small

businesses and savers are fed up with

receiving paltry interest rates in bank

and building society accounts.

“Crowdfunding is all about cutting

out the middleman and allowing small

businesses to get the funding they

need without banks taking a slice

of their margins in fees when firms

take out business loans,” she says.

“For savers, these ventures offer the

potential for much greater returns.”

There is, however, a problem.

Crowdfunding has grown at a rapid

pace and there are a lot of sites out

there, not all of them doing the best for

either investors or business owners.

It’s absolutely paramount that before

choosing this route to funding you do

your research in depth.

Needless to say, not everybody has

a City expert’s understanding of risk

and, make no mistake, crowdfunding

involves at least as much risk as the

stock market. The watchdog, the

Financial Conduct Authority, is taking

a close interest in crowdfunding - and

wants to ensure private investors fully

understand the risks they are taking.

Some of the sites vet the

fundraisers - others don’t. Whether

you’re investing or seeking

investment, I’d say you should walk

away from anyone with no vetting.

In most cases, the investors, who

can usually subscribe as little as £

per venture, are offered shares in the

business.

The websites make money too, of

course. This is usually in the form of a

percentage - typically seven per cent

• of money raised. And sometimes the
  site also takes a slice of returns paid to
  investors.

It can be a fast way to raise finance with no upfront fees.

Pitching a project or business through an online platform can be a valuable form of

marketing and result in media attention.

Sharing your idea means you can often get feedback and expert guidance on how to

improve it.

It’s a good way to test the public’s reaction to your product/idea. If people are keen to

invest, it’s a good sign your idea could work well in the market.

Investors can track your progress - this may help you to promote your brand through their

networks.

Ideas that may not appeal to conventional investors can often get financed more easily.

Your investors can often become your most loyal customers through the financing process.

It’s an alternative finance option if you’ve struggled to get bank loans or traditional

funding.

EIGHT ADVANTAGES OF CROWDFUNDING

IT’S ABSOLUTELY

PARAMOUNT THAT

BEFORE CHOOSING

THIS ROUTE TO

FUNDING YOU DO

YOUR RESEARCH

IN DEPTH”