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Finding startup capital to launch and run a small business can be difficult. Banks are not always willing to take the chance on small businesses, and not everyone has the ability to attract funding from a venture capitalist. As a result, a new method of raising startup capital has taken the UK - and the rest of the world - by storm: crowdfunding.

 

Crowdfunding refers to the process of pitching an idea to a group of people, and anyone who is interested can buy in. It doesn't necessarily have a business purpose, as you can crowdsource ideas and crowdfund for charities or other causes, but it is especially effective when it comes to bringing a product to life.

 

Crowdfunding is made possible largely due to the power of the internet and online shopping. Several large crowdfunding platforms already exist, including Kickstarter, CrowdCube and Funding Circle. Kickstarter, arguably the founder of the entire crowdfunding concept, raised an impressive $580 million USD in 2016 alone for a wide range of projects. Funding Circle, a UK-based crowdfunding platform, has raised over £2.6 billion in the last six years.

 

It's now possible to test business ideas by developing the concept work for a new project, whether it's a new documentary film or a more carefully-designed electric bicycle. All the initial concept work is generated before any actual production occurs, and then the idea is pitched using one of the platforms mentioned.

 

There are several ways that crowdfunding can work:

 

-       A debt system, also known as peer-to-peer lending. The crowdfunding community lends money to the startup to launch a new business, and loans are paid back over time at a pre-determined interest rate.

-       An equity-based system, where crowdfunders invest in the equity of a new business venture and share in its successes and failures. In 2014, the Financial Conduct Authority made certain changes to the law to help protect all parties in this specialised investment system.

-       A donation-based system, which is typically used for specific causes rather than business ventures. Crowdfunders do not expect repayment of their contributions, even though they are not always considered tax-creditable charitable gifts.

-       A reward-based system, which is most commonly used for product-based businesses or creative works. Crowdfunders either purchase an early-access version of a product at a reduced rate, or purchase some sort of 'perk' such as having their name included in the credits roll at the end of a film.

 

Crowdfunding isn't right for every business, but it's an exciting new way to generate capital in a post-recession world where banks are hesitant to take big chances on small businesses.