How to Use Crowdfunding to Start a Business

Defining Crowdfunding

Crowdfunding is a method of sourcing finances for a business or a project from a group of investors, customers, or even lenders. Crowdfunding allows you to get the money you need within a short duration. Traditionally, individuals would crowdfund for their businesses through a group of Angle investors. Today, numerous online platforms allow you to crowdfund for a project or business through a large number of potential funders. Crowdfunding is legal in the UK. Financial Conduct Authority (FCA) is responsible for the regulation of every rewards-based crowdfunding in the UK.

How Crowdfunding Works

If you are not raising donations from friends or relatives, then you will need to browse through a crowdfunding site or platform for funds. Once you are registered to the platform of your choice, you can initiate a funding campaign. The campaign entails introducing your business to potential funders within the platform, the project you are seeking finances for, and the amount of money you need. Donors will see your campaign, and those interested will contribute towards your business.

You will, however, be charged a fee for using the platform, which is a specified percentage of the amount of money raised. Other platforms will charge a processing fee for money contributed to your credit or debit card.

Types of Crowdfunding

There four major types of crowdfunding. They include the following;

1. Equity-based Crowdfunding

This is where a business receives financing from several investors in exchange for some equity or shares to the enterprise. Due to its nature, equity-based crowdfunding is regulated by some rules which are stipulated and executed by FCA. Some recent establishments in the sector require that only experienced investors have the privilege to inject large amounts of money to the business in question.

2. Reward-based Crowdfunding

This is a popular type of crowdfunding amongst most businesses. It involves receiving money from several investors who believe in your project or business in exchange for a reward. Once you have initiated a campaign for your business on a crowdfunding platform, you promise funders certain rewards once they contribute to your business. Such rewards include acknowledgements, gifts, tickets, or some products.

3. Debt-based Crowdfunding

Debt crowdfunding is like any other loan; interest is surcharged to it, and you are required to repay the money after a certain period. The difference with debt crowdfunding is that the loan is coming from a group of different investors. You will be required to prove your creditworthiness before receiving the loan.

4. Donation-based Crowdfunding

Donation-based crowdfunding is soliciting finances from potential funders without offering anything in return. FCA does not regulate this type of crowdfunding, and mainly it is not common amongst most businesses. This type of crowdfunding works well for businesses or companies with an already established social cause or projects initiated by social enterprises.

Examples of Crowdfunding Platforms

The number of crowdfunding websites in the UK has grown spontaneously over the years. Here is a list of some of the major crowdfunding platforms in the UK;

Crowdcube

Crowdcube is among the longest-established crowdfunding platforms in the UK, providing a funding niche to numerous businesses. The website features professional investors available to finance businesses through any of the various crowdfunding options.

Seedrs

Seedrs has grown across Europe, with a focus on entrepreneurial organisations. Seedrs is experienced in equity crowdfunding.

Crowdfunder

Crowdfunder is one of the leading crowdfunding platforms across the UK. It is focused on reward crowdfunding. However, the platform has a reputation for engaging in equity crowdfunding as well.

Lendinvest

Lendinvest is among the leading peer-to-peer financing platforms in the UK, with a primary focus on property loans and mortgages. Its investment in debt crowdfunding allows businesses to access new loans easily.

How to Crowdfund for Your Business

Now that you are conversant with what crowdfunding is all about, here is an overview of how you can crowdfund for your business or project.

1. Adequately Plan and Prepare for Your Campaign

Crowdfunding is about convincing a collection of funders to finance your business or project. You need to prepare your campaign adequately, including how you present your company, offers, rewards, and the reasons why they should support you. You can also browse through other people’s campaigns for insights and come up with a plan that will convince investors about the success of your business.

2. Get Your Goals Straight

You should be clear on how much money you want and the time frame within which you expect the funding. You should also be able to convince the funders on the time within which you anticipate to have the business or project running and what you hope to achieve within the stated period.

3. Initiate the Campaign

When posting your campaign, you must ensure that it is outstanding. Funders will be attracted to your campaign if it is appealing to them. Be aware that the crowdfunding platform you are campaigning on could be featuring some of the most experienced investors across the country or region. You want to ensure that they are attracted to your project for funding.

4. Be Social

Networking and interacting with the audience in the crowdfunding platform can enhance your chances of rallying more support to your business. You can interact with potential funders within avenues such as social media platforms.

5. Express Gratitude

Once you have been able to receive the finances you needed, you should appreciate your funders for their support. You should also give them the offers, rewards, or incentives you earlier promised. If you had not promised them anything, a thank you note is necessary for showing gratitude.