29th June 2013 - Business News

A loan in a crowd

Being a small business looking for finance can feel like wandering through the desert searching for an oasis. You might find it, but there are no guarantees and it feels a bit desperate.
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Bank business loan advertisements appear like mirages: you go to fill out the application, but the computer says no and the offer vanishes. Angel investors are great, if you can find one. Ditto grants. But there are more and more businesses chasing them and the competition alone can make it seem like a futile quest.

Figures from the Federation of Small Businesses (FSB) suggest that despite appetite for borrowing, small businesses are increasingly not bothering – loan applications were down 1% in the final quarter of 2012. Those that did try to obtain a loan were more likely to be rejected – the number of refusals increased from 40.6% in Q2 to 42.4% in Q3. Almost two thirds of the FSB’s members think the availability of credit is poor, while more than 60% of firms also think that finance is unaffordable.

Crowdfunding – raising finance via a group of individual investors who put in small amounts to create one big pot – can cut out some of the desperation and futility. You might still face rejection because you still have to win the funding and convince potential investors that you are worthy, but it probably won’t make you feel as defeated as the blank-faced rebuttal that many SMEs are receiving from their banks – and there will have been a publicity benefit from being on the site too.

Crowdfunding a raise is not an easy option. You have to put in a lot of effort to attract the attention and the £s. It is like having legions of aspiring Peter Jones’s and Deborah Meadens poring over your proposal – except once you’ve convinced the hundreds of anonymous armchair “dragons”, you get maybe £100 or so from each, for which you give them an agreed return or reward, rather than receiving a big slug of cash and advice in exchange for a whopping share of the business.

If you think you want to give it a try, you have to decide how much you want, choose which platform you are going to use for the raise (there is a list on the UKCFA website, not all are regulated yet), then have your pitch accepted by the platform.

Most crowdfunding platforms will perform due diligence on the applications they receive – the sites are not open to everyone to crowdfund anything they like and this is one reason that a growing number of investors are feeling more confident about coming to crowdfunding sites to invest.

Businesses usually submit a pitch, with details of the company background, a bit on the directors, how much they want to raise and what they will use the money for. You also have to decide how you are going to structure the investment offer.

How much do you want to raise? Will you be offering equity stakes to investors? Bonds on which they will expect to receive an annual rate of return? Or rewards, such as T-shirts (harking back to the roots of crowdfunding, when fans stumped up cash to back bands or theatre groups they loved and wanted to succeed, in exchange for merchandise, rather than financial profit).

The platform can help you in the right direction with the type of raise you want to launch. It will depend on many factors, such as the maturity of your business and whether you want the money to refinance existing borrowing or invest for growth. Businesses with proven revenue streams may prefer the debt option – i.e. taking a large loan made up of lots of small loans from investors. This way, you do not give up valuable equity stakes in the company.

Once that’s done and the pitch is ready to go live, you market your request for funding as much as possible. Some businesses use the platforms as a formal place to gather family, friends and people they know together. Others want to extend their reach to private investors with whom they have no association. Projects that raise nothing for the first few days tend to stay flat. Once a raise is about 25% funded, a tipping point of sorts is reached and the crowd either jumps in or it doesn’t.

Although crowdfunding is about an audience engaging, often just because they like you as much as for financial reasons, investors coming to the sites are increasingly coming for a return as the industry grows up and its reach widens. There is evidence that traditional angel investors are active on crowdfunding sites – the smaller investment sums permitted allow them to diversify risk.

This places a lot of onus upon the business to get the terms of the offer right as well as their presentation. Great pitches help a lot. Key to successful crowdfunding is transparency – as the small business owner responsible for delivering their return, people want to see the whites of your eyes – and your accounts.

This openness can pay dividends in ways other than getting the cash in. It is a great marketing tool: brand awareness among a curious audience and a way to test your product ideas. If no money comes in, you have to wonder, was it the pitch or the product? And if it does, it’s a great indicator that your business is going in the right direction.

For more information visit: www.ukcfa.org.uk or www.trillionfund.com

 

Via New Business