PLAN PROPERLY FOR APPROACHING THE CROWD

December 2, 2014

By Greg Bolton, head of corporate finance at RMT Accountants & Business Advisors Ltd

One of the most high-profile business developments of 2014 has been the maturing of the UK crowdfunding and peer-to-peer lending industries, with investors keen to find out more about the opportunities and risks involved of seeking returns that are potentially way above those offered by conventional savings products.

As members of the Association of Crowdfunding Experts, we’ve been involved with a number of firms looking for investment through different crowdfunding initiatives, and it’s been very interesting to see how the available options have widened as the year has progressed.

It’s an area that we think can only continue to expand into 2015, and we’re expecting to be talking to even more North East businesses about what it might offer them.

However, there’s a great deal more to successfully navigating your way through the crowdfunding process than simply saying “we need x thousand pounds to fund this idea,” and if it’s a route down which you’re considering taking your business, you need to go into the process with your eyes wide open.

Once you have established how much funding you need and that crowdfunding is the route to take, you should consider the type of crowdfunding that is appropriate for you.

The three most common types are equity, debt or reward. With equity funding investors receive a share of your business in return for their investment, while with debt funding, you are taking a loan from the crowd which is repayable, with interest to the investors over a period of time.

With reward-based crowdfunding, investors receive something other than ownership or money from you in return for their investment. For example if you are developing a new product, investors may receive one of the products when completed in return for their investment.

The recent Kickstarter fund raise for Lunar Mission One to send a probe to the moon is an example of this type of funding. Amongst other things, investors can have their DNA sent to the moon in return for funding.

There might also be a range of regulatory requirements with which you need to comply before you finalise the terms of any contracts on which you base your investor relationships.

If you choose to work with a facilitator to help get your proposition in shape, make sure you’re fully aware of the fees and/or commissions that you will be liable to pay to them.

You should also ensure that you’ve fully investigated the tax implications of whatever proposition you put forward, both from your own company’s point of view and from that of your investors.

There’s potentially a lot for businesses to gain from taking this approach to accessing new capital, but there’s also a lot that could go wrong – as with any commercial decision, take the time to find out exactly what you’re getting into before you get into it.

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