Posted on: 19 August 2014

Crowdfunding is becoming much more popular as a form of raising business funds. Since the beginning of 2014, businesses have been raising £1,700 per hour through it, making it worth a predicted £1.5bn in the UK.

But what exactly is it?

Crowdfunding is a way for businesses or projects to raise money by inviting lots of people to pledge or invest small amounts, usually online. It’s a form of alternative finance, which means that it doesn’t involve traditional banks. Generally businesses advertise their project on a crowdfunding website and potential investors choose whether to pledge money, how much, and the return (if any) they expect.

Why is it of interest to micro-SMEs?

There’s a lot more to crowdfunding than just raising funds. It’s a great way of building a community of followers, engaging with a target audience and establishing long term relationships with those who will support the business into its future.

This makes it very different to the traditional ways of getting finance such as bank loans and overdrafts. These are unlikely to result in feedback from customers about a business or idea and how to improve it. They also seldom generate huge amounts of attention on social media elsewhere. However, these are often part and parcel of crowdfunding.

Different types of crowdfunding

Crowdfunding has three hats depending on the needs of the business or project and the motivations and expectations of the potential investors.

Reward crowdfunding

Reward crowdfunding (sometimes called donation crowdfunding) relies on people’s contributions to projects or causes for often intangible or no return. Depending on the situation, investors might get an acknowledgement in a book or free entry to an event, but their real motivations are usually to support a good cause or to feel bought in to something in their community.

Debt crowdfunding

Debt crowdfunding (also known as crowdlending and peer to peer (P2P) lending) is the most akin to getting finance for a business or project through traditional means. Investors generally expect a financial return for contributing money.

Equity crowdfunding

Equity crowdfunding  (also known as crowdinvesting) means that people get shares or a stake in the business or project in return for their monetary investment. As with any equity investment, when things go well the value of their investment goes up but it can drop too. Investors are usually experienced funders and expect their returns at the end of the project.

View our full Crowdfunding guide or browse through the content below to learn more.

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Business Guidance

How big is the UK crowdfunding market?

19 August 2014

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