Follow The Crowd: A Guide To Business CrowdFunding

OK, Hoffmeister may have told you to follow the bear, but I believe in following the crowd, especially when it comes to looking for business funding options.

CrowdFunding, or peer to peer lending is a rapidly growing means of raising business finance. The most common question I get asked is 'what is it' and 'how does it work', so let me enlighten you...

What Is It

Remember when you used to pay money into your bank, and your bank would then lend it out again, charging slightly more than it paid you? Well crowdfunding is essentially the same, bar you remove the bank, cool eh?

Crowdfunding is linking a large number of people who want a return on their cash, to businesses who are willing to pay to borrow. In essence it is as simple as that.

How Does It Work

Let's say your business wants to raise finance. It presents a case to the 'crowdfunder' who will appraise and decide whether it is a fair risk. It then lists your proposal on their website for all registered members to see.

Investors (you or me) then look at the proposal, look at the risk, and decide if they want to put their money in. The investor decides the return they want (say 6% or 8% per annum) and decides how much they want to put in (could be £20 or £2000).

Your proposal remains open for up to 14 days. Once you have raised all the money you need it then becomes similar to Ebay, in that the next person to invest will need to ask for a lower return than the present highest person, this means that over time your interest rate (the average of each investors return) comes down, until such time as your 14 days elapse and hey ho, you have your money.

Your contract as a borrower is with the crowdfunder, not the investors, and you repay it as you would any normal loan.

The sole difference here is where the crowdfunder raises their capital.

It really is banking in its very basic sense.

The Advantages

As a former banker (sorry for my sins..) the advantages are in risk. If Barclays lent you £50k then they would have a risk of £50k if something went wrong. With crowdfunding you don't have one person with a £50k risk, but maybe 1000 people with a £50 risk, and £50 is a lot less to lose.

This means that businesses can more easily raise up to £100k, with no need for property as security. It really does fill the area that banks don't want to lend to at the moment.

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What Next?

I love crowdfunding as a concept, and have many happy clients who have used this system. It is easy, simple and quick. It also is generally CHEAPER than the high street banks!

If you want to know more then give me a call, add comments or contact me Contact Me.

Dave