For many people, the biggest barrier to starting their own business is finding the money to get their idea off the ground.
While in the past the bank would be the first port of call for budding businesses, bank lending has declined in recent years. In fact, a study published this week revealed that more than half (54%) of people don’t feel it’s worth approaching their bank for business funding.
This trend is driving more people to seek alternative finance for their venture, with 25% of people turning to a risky payday lender to start up their business.
However, crowdfunding is gaining popularity as a way for potential business owners to raise money for their project. There are many different variations on the theme, but the common purpose is to pitch your business idea so that a number of people (whether members of the public or professional investors) come together to raise enough money to get your project started.
Crowdfunding has been popular in the US for some time, but the market is growing in the UK since the 2012 launch of the local Kickstarter platform, the best known name in crowdfunding in the country. Ideas are pitched on the site with a deadline to reach a set financial target. Members of the public donate small amounts, often in exchange for rewards (such as early access to the product upon its release, or shares in the business). If the target is not reached by the deadline, none of the backers need to honour their donations. Kickstarter tends to work best with projects that have a set goal – such as bringing a product to market or expanding a small shop.
Another option is Funding Circle, which is more reminiscent of traditional funding and suited to businesses with expansion plans. Reserved for businesses with existing turnover, Funding Circle offers low-interest loans provided by a number of investors.
There is no shortage of success stories for crowdfunded projects. The developers of Pebble, a smart watch prototype, initially set a target of $100,000 on Kickstarter to manufacture their product. More than 69,000 people took interest in the product and the company ended up raising over $10m.
Of course, not every business will see this amount of success from crowdfunding, and there is a lot to consider. You need to be absolutely dedicated to your project – you can’t raise thousands from well-meaning investors and then not see it through to the end. You also need to consider what you can offer your backers – whether it’s a small amount of equity in exchange for a donation, or paying investors back with interest.
Crowdfunding is certainly a route to consider for entrepreneurs who need an extra bit of cash to get their business idea off the ground, and the options are only set to increase as the prospect gains popularity in the UK.