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Types of Business Crowdfunding

Crowdfunding is a way for people, charities and businesses to fundraise. It’s a mechanism that allows organisations or individuals to invest in (or donate to) crowdfunding projects to help get them off the ground. As with any investment type there can be risks involved, and it’s important to understand what these are from the outset.

Here we look at the different types of crowdfunding which are most popular amongst small businesses.

What is crowdfunding?

Crowdfunding provides a ‘democratic’ way for businesses (particularly SMEs and start-ups) to achieve the funding they need. No longer only the preserve of wealthy investors, crowdfunding means that just about anyone can put any amount - however small - into a small business they find interesting.

The popularly of crowdfunding has exploded in recent years, with a big attraction being that the smallest, most affordable amounts of money can be put in. It works by sheer numbers, based on the idea that a ‘crowd’ of many people investing a small amount will achieve the necessary money required. It brings about a large pool investment to be spent on anything from hiring staff or premises to building a prototype. There are several popular crowdfunding platforms available including Seedrs and CrowdCube.

How does crowdfunding work in practice?

Businesses need to sign up to an online crowdfunding platform and design a fundraising campaign. The campaign should grab investors’ attention, giving an overview of the business, as well as its management details goals, ethos, business plan, and what any money invested will be used for. Depending on the type of crowdfunding platform used, the campaign will offer interested parties rewards or equity in return for their investment.

Each crowdfunding platform works slightly differently, with some taking an all-or-nothing approach. This means that if the total fundraising amount isn’t reached, then no money is invested and everyone walks away. Other platforms (like equity crowdfunding ones) may go ahead and invest the amount pledged at the end of the campaign even if the target wasn’t met. Crowdfunding platforms take a percentage of the money pledged by investors, before passing the rest on to the new business.

Another big attraction of crowdfunding - besides the chance to raise money of course - is that it’s a good opportunity to gauge investor appetite more generally. As a new company it’s tempting to believe that everyone will love your product as much as you do, but if only very few investors seem interested then you’ll need to change tack. Asking for feedback via the platform is a great way to also bring about ideas and be interactive.

As with any kind of funding search, crowdfunding isn’t easy. You’ll need to be tenacious and build momentum in pitching your idea and achieving your funding aims. Even once you’ve had success, you’ll still need to grow your business, work at maintaining investor interest and keep them engaged.

Equity crowdfunding

Equity crowdfunding allows people to invest in a brand new unlisted company (i.e one which is not currently floated on a stock market) in return for shares in that company. These shareholders then have a vested interest in the business doing well, as they then receive a share of the profits. However, if the company suffers losses then they may have to say goodbye to some or all of their investment - this is the risk element. The beauty is that there can be as many shareholders as a business likes and it opens up to a larger pool of investors.

Peer-to-peer crowdfunding

Peer-to-peer crowdfunding platforms, including FundingCircle and LendingCrowd, pool investments and lend out cash to businesses. It’s based on the assumption that the business in question will be a success, and investors will therefore get their money back with interest. Sometimes referred to as loan-based crowdfunding, debt crowdfunding or peer-to-business lending, it works in a very similar way to a traditional bank loan.

Reward-based crowdfunding

This is perhaps the best-known type of crowdfunding and popular platforms include Indiegogo and Kickstarter.

Reward-based crowdfunding involves individual investors putting forward relatively small amounts of money to projects in exchange for some kind of reward. How big this reward is tends to reflect on the size of the investment. Rewards may typically include something small like a thank you on the company’s website to something larger such as free advertising space.

Donation crowdfunding

Donation crowdfunding (also known as donation-based crowdfunding) offers a way of obtaining funding from a crowd of donators for a project which has certain social benefits. These could be community or socially minded enterprises for example. As money is raised by donations it works the same way as charity fundraising where the person making the donation has no stake or share in the business, and expects no money back in return. It’s about altruistically helping a small business to succeed, rather than making a return on investment.

Has your business undergone research and development work recently?

Don’t forget to see if you could claim R&D Tax Credits - it’s open to all UK companies and sectors and could easily be worth thousands.

R&D Tax Credits work by offering a reduction in a company’s Corporation Tax bill to help with costs involved in innovative scientific or technological advancement. The scheme is even open to loss-making companies too, by providing the relief as a cash lump sum.

Eligible businesses can claim up to 33 pence in every £1 spent on R&D activities, and there’s no upper or lower claim limit. Qualifying costs are many and varied and include staff costs, R&D overheads, materials and more.

To find out more about how your company could benefit from this highly generous tax relief, see our R&D Tax Credits webpage.

Use our Tax Cloud portal to see what you could be owed, and start your claim today

The Tax Cloud portal was developed by the R&D tax experts at Myriad Associates. Our team is made up of R&D specialists and accountants, and in almost 20 years in business there’s very little we don’t know.

The portal is divided into two sides, one for businesses and one for accountants. It allows you to enter in your own figures to see what you could claim, and takes you through a cost-effective, professional application process. You may well be surprised at the amount you recieve!

If you would like to ask a question or need further advice about any aspect of crowdfunding and R&D tax relief, please call us on 0207 360 4437 or use our contact form. We’ll be pleased to assist you.