Crowdfunding leads the way for Small Business Funding

I am currently working with a small start-up firm, they are self-funded to date and have been looking at traditional forms of small business funding, banks, loans etc. They have plans to expand the business to a national level, needing only a modest level of funding these usual routes have proved impossible or expensive.

We are now working on an application for crowdfunding, also called Peer to Peer (P2P) lending, crowdfunding has enabled over 3,700 firms to borrow over £843million in 2013, and on the supply of funds there are more than 86,000 active lenders.

For small businesses there are currently three types of crowdfunded lending:

  • Debt-based

o   A large number of private investors offer to loan funds to SME’s with an anticipation of receiving an interest rate by way of return.

  • Equity-based

o   A small number of investors are prepared to loan SME’s funds and will take an equity stake in the firm.

  • Reward-based

o   Donors are prepared to advance funds in return for a tangible return, product or services.

The choice of which type of small business funding to take depends upon what you need the funds for, or how and when you are likely to be able to repay the funds.

By far the largest source of crowdfunding for small businesses and start-up firms is reward based. This is an ideal method of trying out your concept, many firms that have utilised reward based crowdfunding can go on to approach institutional investors or participate in other crowdfunding markets once they have demonstrated their capability.

If you have an established firm then debt based funding maybe the way forward, you would have to provide a clear plan as to how the funds are to be spent and typically have a three year trading record and a good credit rating.

The most regulated P2P lending is with equity-based platforms, the leading platforms are regulated by the Financial Conduct Authority. Firms looking to secure funds this way will have to be well established and be able to demonstrate an increasing value for the firm over the near term.

If you would like find out how CMC can help you to raise finance or prepare a business plan, why not download our White Paper “Raising Finance for your business”

Can the crowd provide the answer?
Can the crowd provide the answer?

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