Tags:

What Are The Pros And Cons Of Equity Crowdfunding A Business

1st May 2020
Brought to you by
myfirmsapp
Share this content

Equity crowdfunding is becoming increasingly popular amongst entrepreneurs looking for finance without the worry of a bank loan. Here we look at the advantages and disadvantages of equity crowdfunding when it comes to getting a new business of the ground.

What is equity crowdfunding?

Equity crowdfunding is a way for businesses to raise funds by asking a ‘crowd’ of people to pledge a relatively small amount of money. In return, investors can typically expect a minor stake in the company or some shares in it. Share values will then rise if the company is a success, or fall if it starts to struggle.

How does equity crowdfunding work?

Crowdfunding generally has been in the news quite a bit recently one way or another. Usually it’s to support a charity or other good cause, and equity crowdfunding works in much the same way. Crowdfunding platforms have been set up specifically to facilitate equity crowdfunding for businesses, including Seedrs and Crowdcube. Each business advertises how much money it requires and for what percentage of its company. If the company then doesn’t reach an intended target by its deadline, the money investors have given is returned to them in full.

What the advantages of crowdfunding?

Some crowdfunded projects can bring about a large amount of attention, particularly on social media. This can translate into substantial growth far beyond just the money itself. Other advantages include:

Using it as a marketing tool

An active crowdfunding campaign is an excellent way to draw attention to a business, to make public its vision for the market and emphasise its overall mission. It’s also a free and easy way to reach a large number of people quickly. Most crowdfunding portals also allow you to incorporate your social media, in turn driving traffic to your website and your Facebook, Twitter pages etc. It’s a very organic way of bringing in new customers and potentially new investors. Viral marketing will also hopefully occur if your users share and spread the word to others.

No repayments

As mentioned, equity crowdfunding is different to a traditional bank loan in that it doesn’t have to be paid back. This helps to keep control of monthly outgoings.

It’s the chance for some brainstorming

A particularly big challenge for start-ups in particular is in sharing ideas from an early stage, and shaping the company’s progress using the knowledge and experience of others. By setting up a crowdfunding campaign, entrepreneurs have the chance to discuss their ideas and receive feedback and comments. This is ideal for working out if their plans really are viable, and can bring about further inspiration. Think of it as a dummy run to see if your product really is marketable.

Entrepreneurs maintain full control

Unlike other investment types, no control of your company needs to be forfeited when raising capital. You are the one who decides the campaign’s structure, how much money you need and how the company will be run going forward.

It’s easy, accessible and fast

You typically don’t need to have any specific qualifications to get a crowdfunding campaign going and it’s not hard to work your way through setting up. There are also plenty of helpful hints and tips online. Within a few minutes you can have the basics of your campaign nailed down, and once you’re happy it can immediately go live to the world. It’s ideal for those who really don’t fancy making a lot of pitches or presentations or tracking down possible venture capitalists, and although a business plan is highly recommended it isn’t essential.

What are the disadvantages?

Although crowdfunding is a popular way of gaining valuable finance, there are a number of disadvantages to consider too. These include:

The need to invest time and effort in keeping your campaign going

Setting up is easy - the hard part is in maintaining it! Filling out a few online forms and simply hitting ‘post’ is likely to mean a disappointing result. You’ll need to put together a plan to keep it alive too, alongside a healthy marketing strategy. This may require enlisting some help from people with previous experience in designing and implementing successful crowdfunding campaigns. You’ll also need to answer queries from potential backers quickly and effectively.

It can be all-or-nothing

Many crowdfunding platforms will only allow you to benefit from the pledges of your investors when your set goal is met. So if you aim to make £15,000 and you only get to £14,000 then once time has run out you receive nothing. This makes it essential to set a goal amount that’s realistically achievable, otherwise it could end up being time wasted.

Equity crowdfunding can affect future financing

If your crowdfunding campaign isn’t as successful as you hoped, it can stay present on your chosen crowdfunding platform forever. It’s then visible to any new potential investors in future who will see everything including how far short you were. Even if your campaign was in fact a success, sophisticated investors may feel hesitant to invest alongside shareholders who have much more limited business experience.

The effort may outweigh the gains

If you’re looking to raise a fairly small amount for your business, spending too much time and effort on equity crowdfunding may not be the best use of your time. It’s in fact better suited to larger amounts, where small bank loans or personal financing from friends and family isn’t possible.

Contact us

At Myriad Associates we are highly experienced in all things R&D tax relief. We understand how difficult essential business funding can be to achieve, whether it’s starting from scratch or beginning a new project.

As a proactive and trusted business accountant, it’s also incredibly helpful to flag up the various government reliefs on offer to both new and established UK businesses. These include R&D Tax Credits, R&D Grants and Video Games Tax Relief (VGTR).

To discuss in more depth how innovative companies can benefit from these reliefs, please do call us on 0207 118 6045 so we can work with you to assist your clients. Alternatively, you can send us a message and we’ll call you back.

Tags: