Crowdfunding is a form of finance where a wide range of investors (the ‘crowd’) all contribute small amounts of money to fund a project, idea or business. The service is delivered mostly via the internet through online platforms such as CrowdCube, Seedrs or Funding Circle that introduce businesses or projects seeking funding to potential investors. There are four different types of crowdfunding:
- Equity Crowdfunding – where the investor receives shares in the enterprise receiving the funding.
- Debt based Crowdfunding – is where the investors provide either loans or finance to a business. Secured and Unsecured loans are available via the Peer to Peer lending sites for more established businesses with strong balance sheets. This is likely to be more expensive than the same loan from a bank, if available.
- Reward based Crowdfunding – where the investor receives a reward or incentive from the organisation receiving the funding. The level of the reward will often increase with the size of the investment made. A standard rewards campaign will offer at least three levels of pledges/rewards.
- Donation based Crowdfunding – where investors will make a contribution to a project for largely social reasons, and receive token rewards often based on the level of the donation. It may be that they receive nothing more than the satisfaction of having made a contribution to a cause close to their heart.
Crowdfunding is particularly appealing to start-up companies as they are more likely to be turned down by more traditional sources of finance.