The technological revolution has brought with it a number of innovative new ways of funding a business, which for the entrepreneurs and aspiring business owners out there can only be a good thing.
Now, rather than heading cap in hand to the local bank, you can simply switch on your computer, get online and raise the money to start a business. Crowdfunding might seem like an unlikely way to fund a business, but it continues to grow in popularity with private investors who have endured record low interest rates for years.
What is crowdfunding?
Courtesy of the UK Crowdfunding Association, crowdfunding is: “A way of raising finance by asking a large number of people each for a small amount of money.”
Crowdfunding lets private investors pledge money to get behind a business idea or product they want to bring to life. By asking lots of smaller investors to contribute to the project, the hope is enough money can be raised to kick start the business. In return for the funding, the business will give the investors equity, membership or discounts.
In 2015, equity crowdfunding was worth more than £245million and it is continuing to rise in 2016.
As with any potential business funding option, there are a number of advantages and disadvantages associated with this funding method that you should consider before seeking investment online.
The advantages of crowdfunding include:
- Project visibility – Rather than going out and finding investors, crowdfunding allows the investors to come to you. Simply upload your business idea to a crowdfunding website and investors can pledge their funds.
- Investor engagement – Crowdfunding can be an effective way to market your business to potential customers before it’s up and running. This can help to build brand loyalty and create a community of consumers with an interest in your business.
- Anyone can apply – An incredibly diverse range of business ideas attract investment through crowdfunding. The type of business a bank might refuse could be a big hit amongst private investors.
- Gauging interest – Crowdfunding can also be a good way to gauge the level of interest in your business before you take it to market. Failing to attract the investment you need could be a sign that there’s insufficient demand for your products or services.
The disadvantages of crowdfunding include:
- An obligation to fulfil – If you successfully raise the money you need then you are obliged to start the business or bring the product to market. So, it’s essential your business plan is realistic before you ask for money.
- Public criticism – As well as praise and the constructive criticism that could help you fine tune your business, you could also receive criticism that damages your business’s reputation.
- Risking intellectual property – By putting your idea out there for all to see there is a risk that someone could simply run with it themselves. Make sure you protect your business as much as possible with trademarks, patents and copyrights where appropriate.
If you feel like crowdfunding could be for you, here are some of the most reputable crowdfunding sites out there for you to consider.
How can we help?
Prosper provides a comprehensive approach to accountancy, tax & business growth services for start-ups, SMEs and growing companies across the UK. We are your bookkeeper, accountant and finance director all rolled into one. Check out prosper.accountant to learn more about how we can help your business.