One of the main issues for small and medium-sized enterprises (SMEs) seeking funding for growth is whether to raise capital by giving away equity or seeking loan funding – known in the case of the peer-to-peer (P2P) crowdfunding that we do as P2P business lending.
Equity and debt: how different crowdfunding schemes work
There are two main types of crowdfunding - equity and debt. Equity crowdfunding tends to be for start-ups so smaller sums of money are involved and in return, the investor will get a share of the business - the value of which will go up or down depending on how the company performs.
In debt crowdfunding, investors generally lend to more established businesses and receive interest on their money. The investment could take the form of a mini bond, or a peer-to-peer loan.
In addition to the financial incentives, some crowdfunded businesses cement support from their customer base by offering them perks linked to the business.
For example, the 'burrito bond' launched by Mexican restaurant Chilango on Crowdcube last year offered two free burrito vouchers to anyone who invested the minimum sum set at £500.
There are lots of reasons why a small business might turn to crowdfunding. Post financial crisis, it can be difficult to get traditional funding from a bank, especially if the founders have little or no experience in that area. Or perhaps they have a less than ideal credit rating.
But crowdfunding is not always borne from necessity. The creators of a cult product or service already know they have a committed audience so asking them to help fund can be a logical step.
Andrew Bird of Cubism Law sets out the choices for SMEs as he sees them in this video interview, given at the recent Alternative Finance conference, sponsored by Cubism Law and Money&Co..
Banks have many regulatory and process constraints, but we have long argued at Money&Co. that, irrespective of this, they have not delivered to SME borrowers and individuals seeking good returns on capital alike. See our News story from over a year ago. Depressingly, little has changed.
Learn More About Crowdfunding, Register To Lend
Facts and tips about crowdfunding in general are available by reading our knowledge hub, here.
To learn more about getting good returns on capital potential lenders should click here. Remember, when lending your capital is at risk – please read the warnings on our Home, Lend and Frequently Asked Questions pages.