How does Crowdfunding work?

How does Crowdfunding work?

Crowdfunding is the process of getting your finance from a "crowd" of people - usually complete strangers - rather than a single bank or financial institution. 

At first the idea of this may seem rather complicated and daunting especially when you begin to consider how as a fund raiser you would reach the "crowd" to tell them what you need and then deal with subsequent enquiries and investments, and how as an investor you would find suitable projects to invest in, make sure they are credible and liaise with them during the term of the investment. The good news is that there are now many websites (aka platforms) that intermediate these deals and serve both the fund raiser and investor.

How do Crowdfunding sites work? 

It is easy to explain how Crowdfunding sites work: the websites that intermediate Crowdfunding deals are basically large marketing and administrative operations. They market to both would-be fund raisers and would-be investors inviting them to meet on the website. Here they organise for a fund-raiser to create a "pitch" about why they want money and what (if appropriate) they will offer in return; simultaneously they invite would-be finance providers (investors) to come to the site and see what they can invest in. Once a deal is agreed they handle the logistics of making sure all payments between both parties are maintained for as long as the deal requires. For this they take a fee, usually 2-5% from the fund-raiser and for commercial transactions 0-2% from the investor. 

Are Crowdfunding sites regulated?

The answer to this depends on what they are raising funds for. If it is a commercial activity such as personal or commercial borrowing then, yes, they are regulated by the Financial Conduct Authority; if it's for charity fundraising then they do not have to be regulated.

Are Crowdfunding sites safe to invest in?

In the main yes, they are. However, it is always best to stick to established websites with a track record of intermediating crowdfunding deals.