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Crowdfunding 101: How UK Businesses Can Use Crowdfunding As A Viable Alternative Finance Option

Over the last decade, many new types of alternative finance have emerged in the UK market. Some of these have built upon the traditional methods of funding a business, while others have quite successfully disrupted the market to a certain degree. Crowdfunding belongs to the latter category. Getting a group of individual investors to pitch in together to fund a business isn’t something new, but crowdfunding, with the help of available technology, has made it possible for thousands of people to back a product, a service or even just an idea in their personal capacity.

What Is Crowdfunding?

Crowdfunding is exactly what it says it is. Up and coming businesses (especially the ones that find it tough to raise finance via traditional channels) share their ideas, business plans, product prototypes and everything else that is relevant on a crowdfunding platform and individual investors decide if or how much they want to contribute. The investors, in return, can get equity in the business, dividend from the revenue or royalty from each sale made, depending on the terms of contract. It sounds quite simple, because it is. The only decisive factor here is the merit of the idea being pitched.

The UK Crowdfunding Market

Crowdfunding, as we noted earlier, is exciting for both businesses and investors. However, these are still early years, and it would be unfair to compare crowdfunding with other finance/investment avenues such as business loans or commercial finance. It is estimated that from its inception in 2011 to 2018, crowdfunding has contributed over £600mn to UK businesses.

Is Crowdfunding The Right Choice For Your Business?

Not all businesses are built the same. Crowdfunding can, however, be extremely helpful in getting your business off the ground. Many young businesses and start-ups use crowdfunding just to get through the proof of concept phase (building a prototype, sending products out for testing, acquiring relevant licences and clearances, and so forth). Crowdfunding may be the right choice for your business if:
  • You only need small capital, but you need it fast,
  • Your products/ideas are relatable and solve real life problems,
  • You can’t raise money via other, more private finance options like personal loans, overdrafts and lines of credit.

Types Of Crowdfunding

Most crowdfunding pitches belong to one of the following types:

Equity Based Crowdfunding (Investment Crowdfunding)

This is, by far, the most important type of crowdfunding. As a business owner, you ask for and receive funding from investors who, in return, receive a proportionate stake in your business (in the form of equity). Equity based crowdfunding is ideal for businesses looking to raise a significant sum of money upfront. This is very similar to syndicated angel finance (please read through our guide to angel finance to learn more).

Equity Crowdfunding And Tax Reliefs

Equity based investments in qualifying businesses are eligible to receive tax reliefs (as applicable) under the EIS and SEIS.

Credit Based Crowdfunding

Credit/loan-based crowdfunding is nothing but peer-to-peer finance (P2P finance). Contributors here act as private lenders who lend you money upfront via the crowdfunding platform you choose. You are then required to repay the crowdfunding platform at a pre-set interest rate. This is a good alternative finance option for businesses that don’t want to part with equity.

Reward Based Crowdfunding

Reward based crowdfunding allows you – as the borrowing business – to reward contributors in a variety of ways. The most common reward is early access to your products/services.

Donations/Charity Based Crowdfunding

Not all businesses can afford to pay their contributors back. Social enterprises can raise money in the form of donations/charity and use it to fund their business goals.

How Does Crowdfunding Work?

Crowdfunding platforms play an important role here. There are dozens of crowdfunding platforms presently operational in the UK. Seedrs and Crowdcube are two prominent examples. Once you know what type of crowdfunding you want to go for, you will need to make public a few important details about your business.
  1. What you’re offering in terms of products/services
  2. How they make a difference
  3. If you have any intellectually protected assets
  4. How much you want to raise
  5. How much you’ve already raised from other means
  6. How you plan on using the funds raised
  7. What the timeline of progress will be
  8. What you’re offering in return

Is Crowdfunding Regulated In The UK?

Most crowdfunding activities in the UK are now regulated by the Financial Conduct Authority. Loan-based crowdfunding and investment/equity-based crowdfunding are regulated heavily considering the risks involved. The FCA also regulates crowdfunding platforms in line with their policies.

Things To Avoid While Preparing Your Crowdfunding Pitch

As things stand today, there’s no way really for us to tell what percentage of crowdfunding pitches manage to meet their goals. We do, however, have observed a few key trends that seem to be common denominators among campaigns that fail. Here are the things that you may want to avoid while preparing your crowdfunding pitch:

Confusion And Chaos

This is probably the biggest red flag for any investor. When you prepare your pitch, you need to be as sure as you can about what you’re pitching. Your pitch needs to speak to the investor and answer their questions before they have the chance to even ask them.

Bad Ideas

There’s no way you can sell a bad idea to people and hope to succeed. Paying enough attention to whether the idea is viable, profitable and scalable should be at the centre of your considerations.

Bad Valuation

Many start-ups and young businesses tend to overvalue their ventures. It helps if you bring on board experienced professionals who can evaluate your business for you without any bias. A reasonable evaluation means that potential investors can see how it makes sense to invest.

Crowdfunding Alternatives – Have You Considered These?

Raising money on your own – through personal finance and from your friends/family – is usually the safest bet when dealing with small amounts. However, if you want your business to really take off, you need to take commercial finance more seriously. There are quite a few commercial finance solutions available in the market that, when utilised properly, can prove to be much more affordable and much less tricky than crowdfunding.

Business Loans

Raise money as and when you need it and use it towards the business expense of your choice – from fulfilling purchase orders to settling existing loans.

Asset Finance

Finance the purchase/lease of expensive equipment through fast, affordable and easy asset finance.

Angel Finance

Bring experienced investors on board and benefit from their expertise and industry connections.

Specialty Loans

Use specialty loans like HMO finance, development finance, bridging loans, BTL mortgages and more to raise money from specialist lenders at low interest rates. Commercial Finance Network, a leading whole of market broker in the UK, makes it easy for you to match with UK-wide lenders. Every commercial finance application we receive is decided upon within 24 hours – that’s our promise! To know more or to request a call back, call us on 03303 112 646. You can also fill in this short online form to get started.
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Assessing Your Business Funding Options

Whether you’re a start-up, growth stage or established business, there are a number of external funding options available to you. Whether it be a short-term working capital injection, a long term growth agenda that needs financial backing, or a large asset purchase; there may be more funding options than you might think.

Selecting the correct source of finance for your business will require a number of key considerations, depending on your business needs and circumstances;

  • Is it just money that your business requires? Would your business benefit from the additional expertise of an equity investor?
  • How much funding does your business need?
  • Why does your business need the funding? Is this a short term or a long term requirement?
  • How much can you reasonably afford to borrow and what are your preferred payment terms?

Asset Financing

Finance the purchase of new machinery or equipment via an asset finance arrangement, allowing you to spread the cost of the purchase over an agreed time period. Monthly repayments of principal plus interest gives a distinct cash flow advantage to your business. You can also borrow funds against assets which you currently own, where your existing assets may or may not act as direct collateral against the loan value.

Bank Financing

Bank Loans – Commercial bank loans allow your business to borrow a sum of money in return for regular repayments of principal plus interest. You’ll achieve the best interest rates when you’re able to secure the loan against assets within the business. Though, if you are unable to do this, bank loans are still available, just at a slightly higher interest premium.

Invoice Financing – The ability to recover money tied up in outstanding invoices. In return for a percentage of the invoice value, the financer will pay the invoice value upfront. This gives a distinct cash flow advantage as you will not need to wait 30/60/90 days before receiving the cash from customers.

Business Overdrafts – A short term funding option giving you access to extra funds, typically for working capital purposes. Interest rates are based on your ability to repay the overdraft and are typically slightly higher than that of a bank loan.

Crowdfunding

Crowdfunding, whilst not suitable for all businesses, gives the user access to a large pool of would-be investors who may only be able to invest a small amount of money in return for shares in the business. The strength of the crowd means that you can access your required funding amount via a large number of investors.

Angel Investors                                 

Equity financing may be your preferred financing option. Angel investing is a way of private investors investing their own money in return for an equity stake in your business. Like Dragons Den, you may have the option of working with a solo investor or a group of investors. Angels may take an active role in your business and can be a useful source of business knowledge, mentoring and contacts. There are many tax advantages for Angels such as Enterprise Investment Scheme and the Seed Enterprise Investment Scheme. It is worth finding if your business is eligible as this can help attract angels to invest.

Venture capital and private equity

Both venture capitalists and private equity companies will hope to invest in your business, assist in accelerating your growth, and then exit the business having made a profit from the appreciation of the value of the business. Private equity tend to invest in more established businesses, whereas venture capitalists try to identify early stage companies with high-growth potential.

Source: Business News Wales

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A Complete Guide to Financing Start-ups in the UK – Start-up Loans, Governments Grants & More

Financing a start-up can be challenging. In this post, we explore the various ways – from start-up loans to crowdfunding – in which you can go about overcoming this challenge.

The world has seen unprecedented innovation in the last 30 years. By many estimates, these years account for more path-breaking, paradigm-shift-inducing inventions, innovations and ideas than the rest of the human history combined.

It wouldn’t come as a surprise, then, that this culture of innovation has impacted the economy just as definitively as it has our everyday lives. The smartphones we use, the smart payments we make and the big data we routinely stand in awe of – these innovations have left few aspects of modern life untouched. Much the reason why, there has also been a remarkably noticeable upsurge in the number of people answering their entrepreneurial ‘calling’.

The numbers are telling in this regard. In the last five years, the business registration rate has steadily increased despite all the uncertainties around the impending Brexit. If your start-up is among these, it’s quite likely that you are looking for better ways than putting your life savings at stake to raise enough capital.

The Importance of Financing a Start-up Correctly

Choosing a right set of financing options is of utmost importance for any commercial activity.

For start-ups, however, this becomes an even more sensitive proposition. Unfortunately, many promising start-ups pay the price for indecisiveness, inaction and incorrect decision-making. We have seen that the start-up culture is booming in the UK – but there’s always a downside to every argument. The statistics released by the ONS suggest that 48% of new businesses do not survive their first four years of trading. In 40% of such cases, financing problems is the major reason.

By weighing the start-up financing options discussed below, you can avoid your start-up from meeting this grim fate.

1. Start-up Loans

When it comes to funding start-ups in the UK, start-up loans should be the first option you explore.

In the last few years, start-ups have managed to instil a good deal of confidence among lenders. More and more private lenders and banks have started looking at start-ups as huge opportunities, and not mindless, risk-filled adventures. This pattern means that getting a start-up loan is the most affordable and convenient funding option for start-ups across industries.

What is a Start-up Loan?

Start-up loans, even though granted exclusively to start-up businesses, are more like personal loans than commercial loans. This is primarily due to the fact that start-ups don’t have any history of trading to refer to. In most cases, start-ups are founded by a small group of partners and have no history of business credit for the lenders to go by, either.

In essence, a start-up loan is a small, unsecured loan that hinges entirely on the viability of the business model and the personal credit history of the proprietor or the partners.

With one or more start-up loans, you can expect to raise capital up to £25,000.

Why Choose Start-up Loans?

Start-ups, unlike established businesses, have very specific needs, and start-up loans address these needs better than any other financing alternative.

  • Easy to Secure

Start-up loans are much easier to secure when have a good-enough business plan and a blemish-free credit report.

  • Fast Processing

Start-up loans are processed just as quickly as personal loans. This saves you precious time and resources that can be directed towards a successful launch.

  • Little to No Collateral Required

Most lenders offer unsecured start-up loans, once they are convinced of your repayment potential. For higher loan amounts, some collateral may be required to offset the risk taken by the lender.

  • Industry Expertise

This is one feature few other start-up financing options can offer.

If you receive a start-up loan offer from an experienced lender specialising in your industry of operation, it can add immense passive value to your business.

How to Get a Start-up a Loan?

Although most mainstream lenders offer start-up loans, the eligibility criteria and repayment schedules differ wildly from one lender to another. The easiest and fastest way of securing a start-up loan that is tailored to meet your needs is to have a reputed broker like Commercial Finance Broker on your side. Whole of market brokers can approach UK-wide lenders on your behalf, increasing your chances of getting affordable and customised start-up loan quotes.

2. Government Grants for Start-ups

If you are familiar with the start-up culture in the UK, you’ve probably heard of government grants. Even though relying solely on government grants to finance your start-up is impractical, it’s equally unwise to dismiss this option altogether.

What is a Government Grant?

A government grant is essentially a reward granted to various businesses and charitable organisations under various schemes and from various public funds. The primary motive behind the establishment and distribution of government grants is to incentivise innovation, foster entrepreneurship and, in turn, create more employment in various business sectors.

Depending upon the objectives of the grant, your start-up can receive upfront cash rewards, tax incentives, equipment support, technical support and no-interest/low-interest loans. UK start-ups can receive grants from the local authorities, the UK Government and the European Union.

Government Grants for Start-ups: Types and Features

  • Direct Grant (Direct Finance)

This is the most popular type of government grant available for start-ups and young businesses. When you apply for a direct grant, most schemes and trusts will require you to match the grant reward 1:1. In other words, you can expect to raise up to 50% of the required capital using the grant, while the rest will need to be raised through private funding.

  • Available for start-ups
  • Grant size varies from £500 to £500,000 (subject to available schemes)
  • Non-repayable
  • No interest
  • Soft Loans (Subsidised Loans)

Soft loans or subsidised loans aim to strike a balance between direct grants and private or peer-to-peer start-up loans. These loans, available as government grants, are subsidised with public funds so that cash-strapped start-ups can afford them.

  • Loans up to £25,000 are available for start-ups
  • The interest rates (4 to 6% p.a.) are much lower than other loan alternatives.
  • The repayment terms are lenient and generous.
  • Equity Finance (Tax Incentives)

This is a lesser-used but extremely powerful government grant. Through such schemes, the government promotes investments in start-ups by offering up to 50% rebates in the income tax for the investors. The rebate percentage depends upon the size of the business and the business sector.

  • Income tax rebate up to £100,000 can be claimed.
  • Available for start-ups and young businesses with fewer than 25 employees

Government Grants: What Start-ups Should Know

  • Applying for and winning a government grant is often a time-consuming process. If your start-up requires an urgent finance package, grants may not always be useful.
  • The competition is fierce. In recent years, it has become nearly impossible to win government grants in business sectors that do not have a direct impact on the socio-economic policies of the government.
  • Even if you manage to win a government grant, you will still be required to secure an external loan to raise enough capital.

How to Apply for Government Grants

The application process is, in itself, a bottleneck. The slow processing times and ambiguous terms mean that you will need to prepare an extremely thoughtful grant application to qualify.

If you want to win a government grant for your start-up, a proven and systematic approach must be adopted.

  • Know What the Grant is Trying to Achieve

Many start-ups choose to send applications to any and every grant scheme that comes up. This approach usually results into a great deal of wasted time and resources. Instead, you should aim to apply for grants that have specific objectives relating to your business sector.

  • Communicate with the Grant Body/Organisation

It’s always advisable to have a clear communication with the grant body if any of its objectives or terms are unclear. This will help you understand whether you should invest your resources into preparing a grant application.

  • Prepare a Grant Application That Stands Out

Remember – dozens, if not hundreds, of businesses will be competing against you to win the grant in question. Preparing an outstanding grant application will improve your chances significantly. Your grant application should be able to convey how your start-up aligns well with the grant objectives.

  • Supplement Your Grant Application with a Business Plan

You will need a great business plan to bolster your grant application. In the business plan, emphasise the aspects of your business that directly concern the grant objectives. Additionally, you will be required to furnish any external funding commitments you may have received – especially if you are applying for a direct grant.

  • Keep Checking for New Grants

Dozens of new start-up grants are introduced each month. It’s widely believed that the early-bird applications have a higher chance of winning government grants. The definitive list of available grants can be found at the Business Finance Support Portal launched by the UK Government.

3. Investments

If there’s one thing that has added an extra touch of glamour to the very idea of entrepreneurship, it’s the awe-inspiring risk appetite shown by external investors. The stories of start-ups receiving outlandish investment deals regularly make the rounds in start-up circles – and not without their reasons.

Having an external investor on board can be the most cost-effective way of financing your start-up. There are many ways in which your start-up can bring in external investments. Some of these are:

  • Equity investments (selling a share of your equity in the business)
  • Capital investments (mortgaging a share of your equity in the business)
  • Credit lines (flexible credit lines on an as-needed basis in exchange for a fixed percentage of revenue/profits)
  • Custom investments (fully customised investment plans)

4. Crowdfunding

Crowdfunding is an effective way of raising small sums of money, especially for consumer-facing start-ups. It’s all about letting numerous people contribute in their personal capacities in exchange for a stake in your business.

Crowdfunding is a good way to raise money in order to address specific business objectives such as:  fuelling research, manufacturing prototypes, financing marketing campaigns and entering new markets.

Is Your Start-up the Next Big Thing? We’d Love to Hear from You!

There’s something innately attractive about dreaming of an idea, working hard to bring its seed to life and watching it grow into something significant. The unfortunate reality is that many such dreams are routinely cut short for the want of more funding.

At Commercial Finance Network, we’ve been living the entrepreneurial dream – with all its highs and lows – for over a decade. With the help of our UK-wide panel of specialist lenders, we’ve helped numerous start-ups overcome their financing problems. Customised to the highest degree, the start-up loans we broker are more than just loans – they are what the ambitious start-ups of today need to turn the corner and scale newer, higher peaks of success.

Don’t let the funding shortfall stifle your start-up even before it takes off. Call us on 03303 112 646 or fill in our contact form to request a free start-up loan quote.

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Scots’ SMEs turns to crowdfunding after ‘systemic’ bank failures

Entrepreneurs and small businesses are turning their backs on scandal-hit traditional banks and are using risky, unregulated online crowdfunding platforms in growing numbers to raise capital, an MP has warned.

Issuing a call for more regulation of crowdfunding and better protection of small businesses from predatory banking practices, East Lothian MP Martin Whitfield warned banks “are so close to losing the confidence of people, full stop”. Mr Whitfield warned that distrust and bureaucracy is leading to small business lending being choked off in the decade since the financial crash, contributing to run-down high streets and depressed economic growth outside of major cities.

In a Westminster Hall debate today, the Labour MP and members of the All-Party Parliamentary Group on Fair Business Banking will call for an independent, low cost tribunals system similar to employment tribunals that clients can turn to when they believe they have been mistreated by their banks. It follows recent scandals over the way banks have treated business customers, including claims that RBS’ Global Restructuring Group exploited 12,000 of its own customers.

The GRG allegations are the subject of a Financial Conduct Authority probe, and the bank has set up a £400m compensation scheme. Two former Bank of Scotland staff were also convicted last year over their role in a £1bn criminal scheme at its business turnaround unit.

Lending to small businesses has continued to fall since the financial crash, and many are now wary of even approaching their bank. A British Chambers of Commerce survey last month revealed that 63 per cent of small firms with fewer than ten employees have never sought finance, compared to just 39 per cent of companies with more than 50 employees.

A report from the Fair Business Banking APPG published on Wednesday concluded that there was a “systemic failure” in regulation of business banking.

“Entrepreneurs are not automatically looking to the banks, because entrepreneurs view is that the banks are going to treat them badly, so they’re increasingly looking at alternative finance,” Mr Whitfield said.

“One of the things small businesses say is, ‘look, we’re spending all our time trying to gain access to finance, when actually what we should be doing is improving the business and making it grow’.

“High street banks, working on the classic banking model, are so close to losing the confidence of people, full stop.”

Mr Whitfield claimed that with the biggest high street banks slashing their branch networks, “the whole idea of going to speak to your local bank manager about a loan – it just does not exist anymore.

“The demands that the banks are putting on to drive their profit are driving our entrepreneurs away, so they’re turning to crowdfunding 
and other means, but the problem is that regulation is lacking in that area, so there’s the potential for people to be exploited.”

As well as a tribunal system for bank clients, MPs are demanding a cross-government inquiry into banking regulation and additional funding for investigation of financial crime. “One of the problems is that the police forces don’t have the expertise to do it,” he said.

Source: Scotsman

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Pension funds, small businesses boost growth in UK alternative finance

LONDON (Reuters) – Britain’s alternative finance market grew by 43 percent in 2016, research showed on Friday, with interest from start-ups, small businesses and institutional investors helping to boost demand for services such as crowdfunding and peer-to-peer lending.

Last year, 4.6 billion pounds ($6.2 billion) was raised through alternative channels, up from 3.2 billion pounds in 2015, according to a survey of 8,300 investors and 77 crowdfunding or peer-to-peer platforms.

“Alternative finance has entered the mainstream and is likely here to stay,” said Byran Zhang, executive director of the Cambridge Centre for Alternative Finance (CCAF) at the university’s Judge Business School, which conducted the survey.

Approximately 72 percent of the year’s market volume, or 3.3 billion pounds, was driven by demand from start-ups and small businesses. That was up from 50 percent the year before.

 Peer-to-peer business lending was the largest market segment in 2016, growing by 36 percent to 1.23 billion pounds, providing an equivalent of 15 percent of all new loans lent to small businesses by UK banks.

Major banks reined in their lending in the wake of the financial crisis, and many small businesses complain of poor treatment and difficulty accessing funds.

Several alternative finance providers have sprung up to try to fill the gap, such as peer-to-peer lender Funding Circle, which announced this week it had lent more than 3 billion pounds to almost 40,000 businesses since its launch in 2010.

Another, MarketInvoice, offers peer-to-peer loans secured against businesses’ invoices and has lent 1.7 billion pounds since 2011.

ATTRACTING ATTENTION

After peer-to-peer business lending, the biggest categories were peer-to-peer consumer lending, peer-to-peer property lending, invoice trading, equity-based crowdfunding, real-estate crowdfunding and reward-based crowdfunding.

Institutional investors including pension funds, asset managers and banks were also increasingly backing the platforms, the survey showed. Funding from these sources accounted for 34 percent of peer-to-peer property lending, 28 percent of peer-to-peer business lending and 32 percent of peer-to-peer consumer lending.

 Peer-to-peer lending can offer relatively high returns. Funding Circle, for example, currently boasts an all-time average annual return of 6.6 percent.

But the sector’s fast growth has also caught the attention of the Financial Conduct Authority, which is looking at introducing new regulation for the sector, highlighting concerns about past loan losses and due diligence.

This week, peer-to-peer lender RateSetter, the UK’s third-largest, reported a pretax loss of 23.7 million pounds after it took a hit from a bad loan.

Source: UK Reuters

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The UK has the highest number of new business developments in a developed country despite Brexit

  • There were 218,000 new businesses in the UK last year, a 6% rise year-on-year. 
  • Other developed countries saw an average of just a 2% rise. 
  • Crowdfunding and peer-to-peer lending has been credited with this sharp rise in start-ups.

The UK outranked all other major developed economies in terms of the number of businesses established last year, according to figures from accounting group UHY Hacker Young.

It became home to 218,000 more businesses in 2016, a rise of 6% over year-on-year. Meanwhile, other major developed economies including France, Germany, Italy, Japan and the US saw an average 2% rise in number of businesses over the year.

The UK ranked sixth of the 21 countries studied by UHY, behind China, Pakistan, Vietnam, Malta and India. Across all the 21 countries, there was a 7.7% rise in established businesses.

“Enterprise and entrepreneurship in the UK have been gathering pace at impressive speed,” said UHY’s Daniel Hutson.

“As a range of new sources of funding gain traction in the market and the corporation tax burden lightens, the start-up climate is improving, financial pressures are easing and investment for growth is on the cards.”

UHY credited alternative funding sources, such as crowdfunding and peer-to-peer (P2P) lending, with helping to boost the entrepreneurial environment. The Conservative plan to lower corporation tax to 17 per cent by 2020 may also be helping to attract firms to the UK.

“The figures suggest confidence in the economic outlook, despite Brexit. Whether this is sustainable, given the uncertainties that still surround the ongoing negotiations with the EU, will be something the government will want to watch,” said Hutson.

While the UK had a total of 3.9 million businesses within its borders as of the end of 2016, China — which saw a massive increase of 19% — had 26.1 million.

The US fell in 13th place, with the number of businesses increasing by 2.1% over the year to 11m.

Source: Business Insider