Crowdfunding is the means by which the funding for a business or project is raised not from one bank or financial institution, rather from a collection of individuals who come together to jointly invest. Simply put, it is, as the name suggests, a "crowd" of people coming together to "fund" something that needs finance.
In practical terms the organisation and management of these collective investments is done by one central agency or platform. They gather both investors and borrowers and match up requirements. During the life of the finance agreement this central platform will also manage the logistics meaning information and payments are smoothly processed between parties
Broadly speaking, the types of crowdfunding available fall into three categories:
- Equity:
This is where you sell shares in your company and is usually used by start-ups
or early stage businesses
- Debt:
This is where you take a loan from investors and you usually have to be an
established, profitable business with a clean credit record to qualify.
- Donation/Rewards:
This is when you ask for funding for a charity or worthwhile cause but funders
are not to expect an economic return though they may get token reward (e.g. a
T-shirt, privileged access to an event, special recognition etc.) or the chance
to be the first to try a new product. Typically this type of crowdfunding is
used by charities, not-for-profit organisations, arts events and locally based
causes.
Crowdfunding is growing hugely both in the UK and worldwide. The benefits for those raising money is they can access funds that might not otherwise be available and in the case of businesses can both get funds at better rates and use it as a means to engage with customers, hopefully turning them into advocates. For investors there are the prospects of enhanced returns on their investment and/or supporting a business/project they like.
