Posted on: 19 August 2014

Traditionally if a small business wanted money its only option was to report to its bank manager with a business plan and request the funds. Thankfully times have changed and there are now several ways to access capital, of which crowdfunding is one.

Other than bank loans, overdrafts and credit cards, the main sources of finance for smaller businesses in the UK1 are:

  • Trade credit: suppliers allowing their customers to buy now and pay later
  • Asset backed finance: lending that is secured by an asset, which is taken if the loan is not repaid
  • Invoice discounting: a third party buys sales invoices for a fee
  • Angel investment: affluent individuals or groups provide capital in return for debt interest or equity shares
  • Venture capital: funds, guidance and reputation are given to rapid-growth businesses in return for ownership positions or high interest rates (or both)

The major difference between these forms of finance and crowdfunding is the number of individuals or institutions involved. All of the above depend on one or just a few contributors, whereas crowdfunding relies on many small investments from lots of people. This can result in significant amounts of time and effort being spent engaging with investors.

Deciding which type of finance is right for a business is, therefore, far from simple. However, according to the CBI2, 57% of small and medium-sized firms spend less than an hour researching finance providers. The CBI has therefore launched FindmyFinance, an online tool that helps businesses identify the types of alternative funding that are suitable for their needs.

1 http://british-business-bank.co.uk/performance/facts-and-figures/

2 http://www.cbi.org.uk/media-centre/press-releases/2014/02/we-need-to-shatter-the-equity-finance-glass-ceiling/

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The risks of crowdfunding and how to avoid them

Business Guidance

The risks of crowdfunding and how to avoid them

19 August 2014

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