As we have previously reported, there is currently a hesitance from small businesses and start ups to rely on banks for financial support. Many start ups are turning to alternative financial services to get their business off the ground, and one of the most popular over the last couple of years has been the use of online crowd funding sites.
Crowd funding sites cut out the middle man when it comes to investors and use an online platform to help businesses find funders. Investors can then invest as much or as little as they want to help fund the venture. These platforms have been used by thousands – from filmakers who want funding for a creative project, to inventors who need help to get their company up and running, to pre-existing small businesses who hope to launch a new line. They act in a similar way to the television show “Dragons’ Den” – a target is set, and unless it is reached within a set period of time, the business receives nothing and the investors get their money back. If the target is reached, there are then three options to reward your investors:
- Small reward – In the instance of a film maker funding a creative project, a small reward for investors could be a credit at the end of the film, a copy of the DVD, a piece of merchandise, or even a chance to be in the film. The perks offered usually go up in value depending on the amount invested in the project, however they are more of a symbol of thanks than an incentive. Some projects do not offer perks at all, and investors simply donate due to their belief in the venture.
- Interest – Some businesses offer investors their money back with interest. This means if investors pick the right project, they are able to make back their money several times over.
- Equity – Much like a traditional investment, some crowd funders offer shares or a stake in the company or business. These last two options are risky for investors, as there is always a chance that the company will go bust, and due to the fact that crowd funding is still a recent development, the regulations about what this means for the investor are still unclear.
So why go down this route? Well, since there are no banks involved, the funding is being handled independently, leaving both you and the investors with more control over your finances. There’s also little risk, as if you are unable to raise the full total, the money simply gets transferred back to the investors and you don’t owe them a penny. You may also have raised a great deal of awareness and support during this time, so even if the campaign doesn’t work, the project will still have gained a team of investors who believe in your business. Indeed, crowd funders can also be beneficial to those who choose to invest. Investors don’t need a few thousand pounds to spare to get involved in a business, and they can often receive generous tax breaks for the money they have invested, as well as rewards.
The regulations surrounding crowd funding are still not 100% clear, however the UK Crowd Funding Association was formed in 2012 to help businesses, investors and platforms maintain a fair code of conduct. The association aims to promote crowd funding as a viable and safe way to raise funds, produce a list of regulations to be followed by UK crowd funding platforms and act as the voice of all reputable platforms. Examples of regulations set by the UK Crowd Funding Association include ensuring that donations are kept separate from the company’s main finances, and enforcing a cooling off period for investors, so they are able to change their mind and retract their donation if they wish.
If you are a start-up or small business, and are interested in crowd funding, we recommend you speak to a chartered accountant. A team such as MCC can advise you on whether crowd funding could work for you, or recommend the best funding solution for your project. Send us a message through our contact form with any enquiries, or call us on 0161 707 1500 to speak to a member of our team.