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Crowdfunding - a realistic alternative to bank finance?

When many businesses are starting out or experiencing cashflow issues, they will usually turn to their bank for funding.  Clearly, despite the best laid plans, things don’t always work out as expected and some companies will end up defaulting on loans.

With a period of economic uncertainty looming, banks are having to set aside significant sums should future economic shocks result in some borrowers being unable to keep up their payments.  It has been recently reported that The Bank of England has forced banks to set aside £5.7bn in the next six months and a further £5.7bn in the next year in case borrowers cannot keep up repayments.

Bank’s lending criteria is becoming more stringent, especially for new start-ups with no credit history, so more small businesses are looking for new solutions to boost working capital, but is this the right thing to do?

One alternative source of finance which is growing significantly is crowdfunding.  This is where individual investors pool their money together to support a business or project in return for a small stake or reward.  With interest rates being so low and little return being made on savings, more and more individual investors see this as an acceptable risk to get a return on their funds.  More people are also willing to provide investment to small companies or those with less than perfect credit history.

Since the launch of one crowdfunding provider, Funding Circle, they have provided loans totalling £2.2 billion to 23,730 businesses in the UK and it would seem that more and more businesses are turning to this type of funding.

However it is not as easy as putting an advert up that you need £X to fund your brilliant new idea.  As with any type of investment, it is important for the borrower and lenders to consider the potential issues before anything is put in place.  It is important to be properly prepared as a borrower before seeking investment, i.e. having a realistic business plan in place so investors can see what you are proposing is actually viable.

Disclosing details of your business plan, which potential investors will require, can leave you vulnerable to competitors who can also access the information.

There are also specific issues with crowdfunding, some providers will not provide funding if you do not hit your target investment so all your hard work to attract investors could come to nothing if you fail to attract the total investment that you require.  We are also noticing more crowdfunding companies are requiring the director to personally guarantee their company’s obligations, which is something that requires careful consideration before giving.

Whilst crowdfunding is one avenue to explore, other finance is still available, such as asset based lending or factoring.  It is important to understand all options when considering raising finance and taking on additional debt.

We find that often people will seek additional funding to act as a plaster to try and cover a bigger issue.  If there is a significant underlying issue with the business then this must be addressed.  We recommend seeking professional advice to ensure the company’s position is fully understood and the correct decision can be taken to help the business grow.

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