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Crowdfunding

Crowdfunding involves a number of people each investing, lending or contributing smaller amounts of money to your business or idea.

This money will then be pooled to reach your funding target. Your idea will usually be showcased through a crowdfunding website.

What is crowdfunding?

This short video will give you an overview of crowdfunding.

There are three models of crowdfunding:

  • Donation - the crowd is asked to contribute to a charitable or social cause; can be on any scale (e.g. saving a town hall, natural disaster appeals)
  • Reward - the crowd is offered a product or service not generally available; usually used to finance prototypes/early stage services for testing
  • Equity - the crowd invests in exchange for shares in the business; note this involves heavy financial regulation

If you decide to use crowdfunding to generate finance, you will first need to:

  1. Decide what model will work best for your business
  2. Create attention-getting campaign content (script, photos, videos etc.)
  3. Consider how you will keep the crowd informed
  4. Work out how much funding you will need to raise

Advantages

  • It provides an alternative to funding from conventional means, eg bank loan
  • You can raise finance relatively quickly, often without upfront fees
  • It can raise awareness of your new business
  • Investors are often prepared to provide follow-up funding as the business grows

Disadvantages

  • Your idea could be copied if you haven’t protected it with a patent or copyright
  • Any money you raise will normally be returned to investors or contributors if you don’t reach your funding target
  • Crowdfunding is mostly unregulated (but from 1 April 2014, loan-based and investment-based crowdfunding will be regulated by the Financial Conduct Authority)

Read more on different ways to finance your business with The Business Finance Guide from the ICAEW and The British Business Bank.

Crowdfunding websites

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