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What is Crowdfunding?

Crowdfunding is an alternative to the mainstream bank and other business finance products. Often used as a method of funding by businesses who are unable to provide tangible security such as Property, Plant & Machinery, Stock or Debtors.

The crowdfunding model typically has three parties: the borrower, the investor and the facilitator.

• The borrower who puts forward the funding request.

• The investors (often a mix of everyday individuals, professionals and venture capitalists) who provide the funding.

• The facilitator who brings the parties together, typically through an online platform.

Whereas traditional finance methods involve a business looking to just one or two finance providers to provide the necessary funding Crowdfunding can turn this on its head with potentially a large number of investors providing a smaller slice of the monies required.

Types of crowdfunding:

  • Donation (or Reward crowdfunding)

    Quite simply people invest because they believe in the cause. Rewards are sometimes offered, such as free gifts, tickets to events or acknowledgements on a cover etc.
    Investors have a personal or social motivation for putting their money in and have no expectation of a tangible reward or return of capital.

  • Debt Crowdfunding (or Peer to Peer (P2P))

    Investors are looking to receive their money back with interest over an agreed fixed period of time.

    There has been considerable growth in Debt Crowdfunding over the past few years as businesses have found traditional sources of finance harder to come by during the credit squeeze. With less reliance on security and more emphasis on the viability of the business proposal, it is continuing to prove popular for both borrowers and investors alike.

    Borrowers will apply online via the crowdfunding platform (the facilitator) by completing an application and uploading relevant documents in support of their borrowing request. This is often a daunting task as it is vital that the proposal is presented in the best possible light. At My Invoice we use our expertise to take that worry away by working with you in presenting the finance application on the platform.

    Once the application is uploaded the facilitator assesses the borrower’s credit risk and an indicative interest rate applied. Investors then have an opportunity to provide a share of the loan requested and the facilitator completes the advance.

    Investors make their return from the interest charged and the facilitator from charging a percentage of the loan as a servicing fee.

  • Equity Crowdfunding

    The principles are the same as Debt Crowdfunding however with Equity Crowdfunding the investor is not expecting interest as their return but instead invests in exchange for equity.

    By having an ownership of shares in the business the investors are looking for the business to prosper and the value of their shares to rise. Of course shares can also go down in value and the perception of risk in Equity funding is therefore far greater.

Need Advice?

Crowdfunding looks set to continue its growth in popularity as the demand for borrowing outstrips the availability of mainstream finance. Likewise, with interest rates at a low investors are keen to look for other ways of making a return on their capital. A Win Win for both parties.

As a form of unsecured finance the rates are generally competitive, however they are still likely to be higher than some of the other types of finance that may be available to the business.

If you are looking for funding then call the experts at My Invoice. We can review your overall funding requirement and put together the right finance package to help your business achieve your long term objectives.