(Last Updated On: 13th November 2012)

You may have seen the press yesterday about Lancashire Council investing in a Crowd Funding platform.

As this is a topical issue and my previous blog Crowd Funding – cheap funding or a hidden nightmare? got a good response, I thought I’d provide a more in depth insight into the various types of crowd funding.

Type Donations Rewards Loans Equity
Over-view Funders give money to a project. Funders get no financial or other reward from the Project. Funders give money to a project in return for Rewards, which are often goods or services related to the project. Funders are lenders. They lend money to borrowers at a set term and interest rate. Funders are equity investors. They invest in a company who issues them with share certificates. Investors may also get rewards.
Benefit for Funder Feel good factor. Access to discounted or unique rewards.Feel good factor. Opportunity to lend to a project for a financial and social and/or environmental return. Could earn higher interest than if keep the money in a savings account. Same as for Loans, but also the opportunity to sell their shares in the future at a profit if the business does well.  May get tax relief via SEIS or EIS giving income tax relief of up to 50% of amount invested.
Risk for Funder Funder is giving their money away for no financial reward. No gift aid as often not registered charities. This should be money the funder doesn’t want back. It is the project who is usually responsible for providing the reward. The project may fail to deliver the reward. The borrower may lose the lenders capital and not pay interest. Borrowers may be vetted by the crowd funding platform . Opportunity to invest in multiple businesses to spread the risk. The investor may lose their capital and receive no dividends. The investor may not be able to get their investment out, unless the company is sold at some point in the future. High risk.
Benefit for Project Free funds. Access to funds in return for a good the organisation wishes to sell or provide anyway.Publicity would hopefully increase sales. Access to loans from alternative sources when other sources have dried up. Possibly at attractive interest rates and terms.Publicity. Access to funding, with no interest. Investors may expect a dividend, but no obligation to pay one. No obligation to repay capital.May get mentoring or other expertise from new investors.
Risk for Project Reputational risk if the project doesn’t use the money as intended. Reputational risk if the project doesn’t use the money as intended or provide the rewards. Reputational risk if the project doesn’t use the money as intended or can’t repay loans. Plus financial risk.Loans often unsecured, but lenders would have a right to pursue winding up etc. if borrower can’t repay loan. Original project owner is giving up rights to a portion of future profits and value if the company is sold.Owner must determine the appropriate amount of equity to sell, in order they retain the control they want.

Need to be a limited company.

Here are some links to Crowd Funding Platforms:

Donations: GoFundMe.com

Rewards: Kickstarter.com and CrowdFunder.co.uk

Loans: FundingCircle.com and Buzzbnk.org

Equity: CrowdCube.com

Rewards, Loans and Equity: BankToTheFuture.com

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