How does crowdfunding work for small businesses?

Understanding crowdfunding for SMEs

Crowdfunding is a form of alternative finance that provides essential funding for small businesses. The three main types are equity crowdfunding, rewards-based crowdfunding, and debt crowdfunding, which is also known as peer-to-peer (P2P) lending.

All three involve multiple individuals investing smaller amounts in a business until a pre-set target is reached. The business owners create an online campaign on the crowdfunding platform to encourage investment until the funding target is reached.

A crowdfunding campaign should detail the business’s history, plans for the future, and the purpose of the funding. This type of finance is particularly suitable for smaller businesses as there’s no requirement for a long trading history or good credit record.

How does crowdfunding work?

Equity crowdfunding

Equity crowdfunding involves offering a stake in the business in exchange for investment and can benefit start-ups and early-stage businesses looking to grow. It’s regulated by the Financial Conduct Authority (FCA) and campaigns can generate significant interest to help a company launch.

Rewards based crowdfunding

Rewards-based crowdfunding offers a non-financial return to investors and is an excellent way to test the market before a product or service is finally launched. The rewards offered should be exclusive to investors and generate sufficient interest to allow the business to reach its investment goal. Rewards might involve receiving a new product free of charge, for example, or at a discount before it’s fully released to the market.

Debt crowdfunding

Also known as peer-to-peer lending, debt crowdfunding applies interest to the money borrowed and so is similar in nature to a business bank loan. The money is repaid in instalments with the interest payments added each month.

How do you apply for crowdfunding?

Choosing the best crowdfunding platform is the first step as each has its own rules and regulations for businesses and investors. Our team at UK Business Finance has extensive experience in helping businesses find the right online platform for their needs.

We can support you in developing your online campaign and investment pitch – engaging interested parties and potential investors at an early stage is an essential part of crowdfunding investment success.

Considerations for small business crowdfunding

• Building an engaged audience is one of the keys to success with crowdfunding for small businesses. Maintaining their interest can ultimately result in a stable customer base that supports your business’s ongoing financial goals.
• The fact that crowdfunding doesn’t rely on a tangible trading history or good credit score means that smaller businesses have access to vital funding whilst also being able to generate widespread interest. This can sustain them for the long term if they continue to engage with their community.
• You can make your crowdfunding campaign compelling by telling the back-story of the business, why you started it, and how you envision its future. Showing emotion and being businesslike aren’t mutually exclusive in this scenario as you can demonstrate your passion for your product or service and attract more followers.

For more information on crowdfunding and how it could work for your small business, please get in touch with one of the team at UK Business Finance. We’ll make sure crowdfunding is the most suitable way to attract investment and provide the specialist guidance you need.