Need money? Ask a crowd

Need money? Ask a crowd

For small businesses access to finance has proved troublesome over the past few years. That is unfortunately one of the reasons that company liquidation services is such a successful website.

The economic downturn in 2008 massively reduced the amount of money available through traditional channels for business loans and since that time the big high street lenders have become more and more risk averse.

Smaller companies face difficulty raising the money but will also incur higher charges and greater interest rates as bank endeavour to offset the perceived increase in risk and try to claw back some of the losses they have had over the last few years.

One of the most welcome developments for SMEs has been that of crowdfunding, and this area appears to be a valuable one when smaller entities are looking for cash.

Crowdfunding is the process of getting together a large group of people that put money into the company in the form of donations, loans or by buying shares.

There’s nothing new about the idea of crowdfunding, after all that’s the whole basis of stock markets, but what is new is the method of delivery. Modern crowdfunding uses the power and reach of the internet to cast its net much wider, both in the number and geographical spread of potential investors.

Donation type crowdfunding was arguably the first type that appeared in the early days of the web. Essentially people who had an idea to solve a problem in the public interest but who couldn’t raise money through traditional means went to the net to source a large number of very small donations.

For most businesses this won’t prove suitable but if you do run a public interest company or charity then it’s certainly an area to explore.

For commercial companies it is much more likely that they’ll need to look to equity or debt crowdfunding.

Equity crowdfunding sites such as Crowdcube and Angelsden allow small investors to pool money to make equity investments into smaller companies. These can be early stage start-ups or companies looking to either refinance or to raise money to invest in new services.

The amounts invested by each person can be relatively small, from around £20 as a minimum, but it is also true to say they there are institutional investors on the scene too, which means that particularly attractive propositions gain their full investment very quickly indeed.

For the smaller investors it means that they can develop a portfolio of equity investments for a very low outlay to start with. There’s a sense of excitement in looking for the next big thing and indeed a sense of pride in helping new starts and small businesses on their way.

Although there are risks, most new starts don’t make the five year mark, there is the prospect of either a sale in the future or dividends in the meantime and the equity investment often attracts relief through tax incentive schemes.

If the business concerned needs a cash injection but doesn’t want to sell part if the company then they can look at debt crowdfunding.

This is almost exactly the same as equity crowdfunding in that it utilises the power of the internet to gather together a large group of investors who lend small amounts of money to a business instead of buying shares. Good examples of these would be Fundingcircle and Fundingtree.

As with any other loan the business will pay interest on the loan and can choose to look for an interest only deal (useful for property developments) or to have a standard traditional reducing balance term loan.

Again there are significant benefits to investing in this way. The investor gets to build up a portfolio of investments and can choose the level of risk that they are willing to accept. The loans will be short to medium term in nature and they provide much better returns than simply putting money in the bank.

The interest rate paid by the business is likely to be significantly less than that required by a high street bank, if a loan was available at all and the guarantees, fees and administration are all likely to be a lot less onerous.

There are often other, less obvious benefits too.

Remember that the whole idea behind crowdfunding is that the opportunity gets presented to many people and whether they invest or not, they still find out about the business and its mission. This added visibility can only be good for a new start or growing business.

Similarly people who invest in a company tend to feel a sense of attachment, whether that be entirely altruistic or is simply a result of their own self-interest, the new business has a readymade stock of advocates and cheerleaders in the marketplace.

Finally, interesting businesses often find that alongside the offers of investment, they also get to meet and network with business people of all types who may prove useful. Having access to a group of experienced business people and regular investors can often prove handy when looking for input and advice.

Crowdfunding isn’t for every business and directors should look at both the pros and cons of the offer with respect to their own specific situation having said that, for small and growing businesses it can prove a very useful additional source of funds.

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