How Crowdfunding can help you raise capital

Banks can be very unsympathetic if you have a great business idea or opportunity … but need working capital to make it a reality.

They will of course be more interested, if you have some property to act as security against the loan, but that may not be practical for several reasons. You may not own a property, you already have a sizable mortgage on one, there may be several shareholders who need to commit to a loan and so on.

One source of finance can be Crowdfunding. Wikipedia describes it:

“As the practice of funding a project or venture by raising monetary contributions from a large number of people, today often performed via internet-mediated registries, but the concept can also be executed through mail-order subscriptions, benefit events, and other methods.”

Crowdfunding started out where musicians needed to raise money to tour or record an album. It has since spread to worthy or charitable causes, private projects and more lately, as an alternative to bank and venture funding for businesses, both start-ups and existing businesses with new opportunities.

Anyone deciding to raise cash can set up a project and you will see many crowdfunding projects if you google the term. Some seek to raise money for worthy causes, community or creative projects. The USA is well advanced in crowdfunding and you can see any number of  US sites like indiegogo.com, or pozible.com, or kickstarter.com.

In the UK the Financial Conduct Authority (FCA) and the London Stock Exchange regulates licensing but broadly Crowdfunding there is seen as an established and viable way of raising capital.

In NZ the government body responsible, the Financial Markets Authority (FMA) has acted quickly to the market demand and in 2014 set up a licensing system for intermediaries, that is, those that act as an exchange to match those seeking funds and the investors or funders. In Canada it is the Ontario Securities Commission.

In Australia at the time of writing, businesses seeking Crowdfunding are still waiting for the government to get legislation through the Senate. The government appear to be keen have a Licensing system similar to that established elsewhere.  For the latest on this subject in Australia go to: http://www.innovation.gov.au/

This site describes Crowdfunding and the advantages and disadvantages as follows:

Crowdfunding is a way of financing your business through donations of money from the public. This is commonly done through crowdfunding websites.

Generally, you post your business idea as a ‘campaign idea’ onto the website, with a description of your project. If people want to support your campaign, they can donate money to help you achieve your goal. These supporters are often called backers. On some websites, you need to set a monetary goal, and a time frame to reach this goal by.

To encourage people to support your campaign, you can offer incentives and rewards based on the amount they donate. These incentives and rewards can be anything, such as merchandise, acknowledgement, discounts on future purchase of the product you are developing, etc.

For example, you can propose that for every donation of $10, you will provide an acknowledgement to the donor on your product’s website, and for every donation of $20, you will reward a 5% discount on the purchase of your product once it is produced.
Advantages of crowdfunding
The advantages of crowdfunding over other sources of funding can include:

• a customer base who are already committed to your product

• the opportunity for you to interact directly with your customers, who are also your investors

• the opportunity to get feedback from your customers while your product is being developed and tested

• free word-of-mouth marketing for your product through your backers

• instead of providing a share to investors, you still own your business in full

• lower commitment and risk (if you don’t reach your goal, you don’t have to commit).

Disadvantages of crowdfunding
As with all financing options, crowdfunding also has disadvantages. These can include:

 

• no guarantee that you will reach your funding goal in the set time

• the need to campaign and present your product well to encourage people to fund it

• the need to spend time interacting with your backers and providing them with updates on your product and business development

• providing incentives and rewards to your backers to encourage donations

• the need to deliver the product that has been promised to your backers

• having to compete with other businesses seeking crowdfunding for their ideas and products.

There appears to be a general consensus worldwide, that Crowdfunding will be good for business start-ups and business wishing to change and expand. In time it will mature into a market as a viable financing, capital raising platform for businesses and a relatively low risk alternative for investors.

Before You Go Crowdfunding… Get the Financial Fundamentals Right

Let’s say, you’ve got a great idea for a product/service and feedback from people that it could be a real ‘winner’.  You kick it off from home using your own money, perhaps at the same time as doing your day job, to keep the money rolling in to pay your living expenses.

Things start to take off and you can see it really could be a winner but… you don’t have quite enough money to commit to moving the business out of your garage or spare room at home.

You need money to hire good people, pay for the bond/deposit and a few months rent on premises, serious packaging, a website for promotion and lead capturing.  The Banks aren’t too keen because it’s an unknown quantity and you don’t have any security to offer them for a loan.  

If you are thinking of crowdfunding, you will need to get your financials in order.  If you’ve signed up to a cloud based accounting system like Xero or MYOB that’s a great start.  However, there’s quite a bit more you need to know about how to ‘drive’ a profitable and successful business.