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Is Crowdfunding Really an Easy Source of Business Finance?

Crowdfunding is one of the most rapidly growing forms of fundraising in both Britain and the US, and it’s easy to see why it has become such a talking point. Sites such as Kickstarter and Crowdcube allow individuals and small businesses to pitch their idea or project, demonstrate its value, and ask for investments from anyone in the world, making it a fast-track to finance that was once only available through ‘traditional’ sources.

Could you go viral? Probably not.

For some businesses, crowdfunding can appear very appealing and simplistic – a way of sidestepping rejection from banks, and harnessing the power of the internet. However, while this system might work for a drama group asking for modest funding for a play, bigger enterprises and more ambitious entrepreneurs could struggle to find what they’re looking for.

Joanna Schwartz, the CEO of EarlyShares, an online investment platform, believes that many “overestimate their offering’s potential to go viral, its mass appeal, and the immediacy of need for such an offering”. In a sea of projects, all shouting about their own worth and profitability, how do you make yours stand out? Unfortunately, the unique, creative and perhaps ‘gimmicky’ projects are what tend to make an impression and go viral, so it doesn’t always matter if a small business can prove its stability and has a genuine need for funding which will make a big difference to its operations – if it doesn’t immediately grab people, they won’t invest.

Not practical for many SMEs

Investors in some crowdfunding platforms are not really investors in a traditional sense, as they don’t receive a return, just a gift to recognise the contribution they’ve made. Unless the majority of people who fund a project are millionaires with money to burn, looking for investments that don’t give them much of a return but the knowledge that they’ve helped, probably won’t encourage them to pledge an amount close to what a business will need.

Schwartz also highlights that many investors will want to know more about the person or the organisation asking for funding, rather than just details about why they’re looking for it, as “people are more apt to invest in people”. Raising more significant amounts of capital still “remains firmly in the land of in-person meetings and handshake introductions”, according to Schwartz. She also highlights that investors will want to be informed before they invest, and ask for things that they would have wanted to know ten, twenty and thirty years ago, long before the advent of online crowdfunding; the entrepreneur’s track record, who is on their team and what they envisage for the business or idea long-term. Most of these questions can’t be answered on one page of a crowdfunding site, so the amount pledged will generally be quite reserved if their questions aren’t fully answered.

Crowdfunding platforms that do allow investors to become shareholders are also a risk for individuals, so don’t always encourage people to give generously unless they have complete confidence in something. If they become a shareholder and the small business flourishes, it will be worth far more, but they could never see their money again if the business fails or whatever it’s developing proves to be ultimately unpopular.

Looking for alternatives

An interesting start-up might need an injection of funds and crowdfunding could serve that purpose, however, those seeking larger sums from more traditional sources of finance would benefit from looking further than these kinds of online platforms. There’s no doubt that crowdfunding has democratised the process and has allowed many to boost projects that they could never have got a loan for, but it’s not for everyone.

You don’t need to rely on banks for a business loan, and you don’t have to appeal to the kindness of strangers through crowdfunding either. Confidence in traditional sources of lending has declined in recent years, so many are looking for a way around this. Short term and alternative business loans are ideal for many SMEs, and don’t involve endless meetings or winning over a panel of potential, online investors. Capiota’s process is quick, simple and 90% of eligible applicants are approved. So whatever you need to fund in your business, there are alternatives out there.