Any aspiring entrepreneur wishing to grow their business from humble beginnings to a successful multinational corporation would traditionally require a bank loan or would entice investors to inject capital in return for an equity stake. The latter can be a very time consuming process especially for an SME and there is no guarantee of sourcing funding. Securing a loan has looked unlikely since the financial crisis leading to thousands of businesses being starved of credit. In the latest BCC trade survey of 5,000 businesses over 1,000 small and micro firms (smaller than 50 employees) said that access to finance was a “highly influential factor” when deciding to start exporting; a key area for growth.
Since 2005 entrepreneurs have had another option: Dragons Den. By appearing on the show they avoid dealing with a banking sector unwilling to lend and their search for an investor (or two) takes a matter of minutes rather than weeks, months or years and they receive some free publicity at the same time. However appearing on national television isn’t for everyone and with many businesses walking out of the studio without securing the investment many entrepreneurs would be put off. So in 2014 what other option does a business have?
Crowdfunding isn’t exactly new but it is here to stay. Originally conceived as a way to raise money from the “Crowd” to fund unprofitable creative projects, crowd-funding is now being used by start-up companies to raise capital from as well as by established companies to fuel greater expansion.
Companies wanting to raise money through crowd-funding typically have two options: Offer an equity stake or offer a bond. When raising money through an equity stake a company sets a funding target e.g. £250,000 and advertise to the crowd of ‘Angel Investors’ – often members of the public, who in their hundreds and thousands offer the business funding from as little as £10 until the company reaches its £250,000 target, with each investor receiving equity. The second option is to offer a bond. These investments are typically unsecured so companies often provide investors the opportunity to receive a steady income of around 6-10% per annum on their initial investment and receive their initial investment back after around five years.
Figures from Crowdfunding Centre show that the number of backers for projects in the theatre sector growing from 263 in January to 2,090 by the end of March. However it extends far beyond the creative sector. A search of crowd-funding websites based in the UK reveals opportunities for private individuals like myself to invest in international private airlines, vineyards, ‘Silicon roundabout’ tech-companies, restaurants and clothing companies and hence small-medium sized business owners from all sectors can raise financing in this manner.
Crowd-funding is clearly innovating the way businesses grow and raise finance. Visiting the bank or appearing on Dragons Den are no longer essential and crowd-funding provides an interesting new platform for investors to search for opportunities. Business owners should aim to reassure nervous investors given that the majority of new companies fail in the early years but with the option to invest very small amounts private individuals can now build diverse portfolios in companies not publically listed without having the burden of involvement with the running of the company (although this is an option) and crowd-funding is regulated by the FCA.