What is crowdfunding and how does it actually work?

Crowdfunding is a way of raising money for a business venture, personal endeavour, or charitable cause, where a large number of people invest in or donate money to the cause. Crowdfunding is becoming more popular with start up and early-stage businesses which can often struggle to secure funding from traditional lenders such as banks or financial institutions.

As the name suggests, crowdfunding is about engaging a crowd of people to co-fund a particular project. Funding for say, a start up business, can be provided by hundreds or even thousands of individual investors. They all come together to provide money to get a project off the ground and all share in the risk or reward of that project.

Crowdfunding works well in today’s social media driven environment as it’s all about telling a story and inspiring people to invest in your particular venture. There are different types of crowdfunding including donation-based crowdfunding, equity crowdfunding and debt crowdfunding.

Donation based crowdfunding is where people simply give some money to a new venture. Those who donate often get something tangible in return, such as being one of the first customers to receive the new product or service.

Equity crowdfunding is popular with business start-ups as it allows the new business to offer some shares in exchange for incoming capital.

Debt crowdfunding allows individuals to act as private lenders. Those lenders can spread risk by pooling their funds to lend to a wide variety of businesses. The debt must be repaid and the repayments usually happen on a monthly basis.

Popular crowdfunding platforms in the UK include Crowdfunder, JustGiving, Crowdcube and Funding Circle. Different platforms suit different needs so it is worth doing plenty of research before deciding on using a particular crowdfunding platform.