Crowdfunding and peer-to-peer lending are ways of getting funding for your idea or business from groups of people.
Crowdfunding is when a group of people invest money in an idea or business in exchange for:
- incentives or rewards
You can get this type of funding through a crowdfunding website.
Crowdfunding websites let you:
- explain why your idea or business needs to raise money
- choose how much money you want to raise
- choose how much of your idea or business you're willing to sell
- offer any incentives or rewards for investing
For example, you may want to sell 20% of your business to raise a total of £30,000. Or you could offer discounts on products or services in return for money.
Your attempt to raise money on the website is called a 'campaign'.
Some crowdfunding websites let people invest as little as £10. The total investment will rise as more investors give money to your campaign.
Choosing a crowdfunding website
When choosing a crowdfunding website you should check:
- how much it charges
- whether it takes a percentage of your investment
- whether it lets you get investment from overseas
- whether its investors are amateurs or experienced professionals
- for any limits on how much money you can raise
- whether you can keep money raised without meeting your full target
- how much other successful campaigns have raised on the site
- whether it will help you market your campaign
- whether it lets you manage the relationship with your investors
If your campaign is quick to reach the initial amount of money you asked for, you could enter 'overfunding'.
Overfunding allows more people to invest after your initial total has been met.
This means you can raise even more money for your business, but you might also sell a larger share of it.
Incentives or rewards
You might need to offer incentives or rewards to encourage people to invest, for example a discount on one of your products.
You should be careful that you:
- don't lose money on any incentives or rewards you give away
- can actually deliver the incentives or rewards you promise
If you give your investors shares for crowdfunding, you could end up with a lot of shareholders.
You should think about:
- what rights you want to give them
- how you'll manage your relationship with them
For example, you could give your shareholders the right to:
- vote on decisions you make in running your business
- a discount on one of your products
Your crowdfunding platform might be able to help you manage this relationship.
Peer-to-peer lending involves a group of people each lending you small amounts of money.
For example, instead of borrowing £50,000 from a single lender, you could borrow £1,000 each from 50 different lenders.
Because each person is only lending you a small amount, you might be able to raise more money than you could from a single lender.
Your lenders make money by charging interest on your loan.
You make your repayments to the peer-to-peer lending website. The website then divides your repayments between your lenders.
Choosing a peer-to-peer website
When choosing a peer-to-peer lending website, you should check:
- how it decides if you're eligible for a loan
- what security it needs
- how you'll need to repay the loan
- for any arrangement fees you'll be charged
- for any success fees or commission you'll be charged
- what happens if you miss a loan repayment