Businesses looking for cashflow may not often think beyond the traditional types of funding. Bank loans, overdrafts, invoice financing and all manner of other solutions available from banks are naturally a first point of call for SMEs, and finding the right solution can ensure a business has the finance it needs for anything from day-to-day cashflow, to expansion or growth.
The EFG enables small businesses with a workable business proposal, but lacking sufficient security, to borrow money from approved lenders. And under FLS, Lloyds TSB is providing discounts of 1% on annual interest charges to business customers borrowing on term loan or hire purchase - for the whole life of the loan.
For businesses seeking an innovative way to raise funds, or an option that doesn't involve debt financing, crowdfunding may be a solution.
Starting life in the United States, crowdfunding emerged as a way for artists and musicians to raise small amounts of money from a large pool of investors – often loyal fans – to fund a project, performance or album. In return, investors could expect rewards, for example a copy of a latest album or free performance tickets. In 2009, US company Kickstarter was launched, offering a dedicated platform for investors to find – and fund – creative projects.
"We were the first to take the leap from a reward-based model and transform it into a solution for businesses," he says. "Equity crowdfunding is an evolution from bringing one-off rewards to investors. The relationship between the investor and business is typically much stronger, as the investor will take shares in equity in a business."
The mechanics
Once all of these are submitted, explains Luke, Crowdcube will 'vet' the business, in a process which typically takes a couple of weeks. "We need to ensure that the business has provided all of the information that an investor's going to need to make an informed decision, and to ensure that the business has the best chance of success."
"When a business is live on the site, the pitch duration lasts for 60 days – so they effectively have 60 days to reach their funding target," Luke says, but faster times are not unusual. "The average time it takes for a business to reach its target is around 50 days, but we recently funded a company that took just five." And after the target funding amount has been met, it can take up to four weeks to finalise the transaction and for businesses to receive the money into their account.
'Democratising investments'
Crowdfunding has been shown to offer a variety of benefits to both businesses and investors.
While investment in a crowdfunding project is high risk, there are many advantages, states Luke. "Ultimately, it allows individuals to invest in businesses that they previously wouldn't have been able to, unless they were very wealthy. We've tried to make investing which was typically exclusive, become inclusive by democratising investment, and allowing 'ordinary' people – as opposed to only wealthy investors – to be involved in the process," he explains.
"And for those with more money to invest, they can invest smaller sums of £5,000 to £10,000 in a number of different businesses, as opposed to a lump sum of, say, £100,000 in one business, so it can be used to spread the risk and create a diverse portfolio." And, Luke adds, money won't leave an investor's account until the target funding amount has been met – so there's no loss to the investor if the project struggles to find enough investors."
In addition, equity crowdfunding offers investors of any level the chance to put their money into a UK-based investment-ready business, potentially with tax relief.
An innovative solution for businesses
Crowdfunding is of real benefit to businesses thanks to the global connectivity of the internet and access to a wider pool of potential investors than ever before. According to Luke, crowdfunding can work best when a business already has an online presence or following. "Because crowdfunding is very much an online platform, businesses might already have an online customer base, website or community, which they can tap into to raise investment," he explains.
"One pitch that was funded earlier this year was a company called Escape the City. By drawing on the 60,000 members of their website, alongside their pitch on Crowdcube, the company raised £600,000 in two weeks," Luke states. "The company even had offers from venture capital funds which they turned down, because the speed with which they could raise funding online was deemed a real plus point for them."
Yet while crowdfunding offers an innovative way of gaining finance, Luke believes it doesn't necessarily compete with funding solutions that banks or lenders offer. "Equity crowdfunding is very much geared towards startup and early stage businesses typically looking to raise between £50,000 and £150,000. In many ways, like banks, we help the businesses get up and running – banks will typically provide debt finance and bank expertise, while crowdfunding provides equity finance along with the experience and support of investors," Luke states.
Angel investment is another source of funding which uses the power of networks to complement bank finance and which SMEs might also want to explore. Angel investing tends to rely on one or two investors to raise the full amount, while crowdfunding tends to utilise networks of 20-50 individuals investing smaller amounts.
Mitigating risk
Of course, any investment comes with an element of risk, and Luke explains that crowdfunding isn't a 'silver bullet' for businesses or investors. "It's a very viable alternative to existing ways of raising finance if a business is in its early stages, but you still need to have a good plan, be proactive and most of all, offer an attractive proposition to your investors - as you would when you seek any finance.
"In addition, crowdfunding projects can be high risk investments, but with the option to invest smaller amounts, then this risk can be mitigated," Luke concludes.
Any property given as security which may include your home, may be repossessed if you do not keep up repayments on your mortgage or other debts secured on it.
This content has been provided by Lloyds TSB, part of the Lloyds Banking Group.
The Lloyds Banking Group includes Bank of Scotland plc and a number of other companies using brands including Lloyds TSB, Halifax and Bank of Scotland, and their associated companies.
We'd love to hear your views and thoughts in the comments but please remember not to disclose personal identifiable details.
.jpg?w=600)
