Caution needed in crowdfunding move

July 12, 2012

The recent chart success of South Tyneside musician Ginger Wildheart came on the back of an entirely fan-funded album, and the Unbound Books concept – where authors pitch their ideas and readers subscribe to the ones they’d like to see published – has led to a number of books reaching the shelves that otherwise probably wouldn’t have made it.

From a business point of view, the idea of crowdfunding has a great deal of appeal, and there are already numerous platforms out there through which companies can make a pitch to investors for loans, equity or both.

For example, one of the best known organisations in this market, Funding Circle, through which established small businesses borrow from individuals who bid to lend them their money, claims to have already provided over £36m in loans to UK companies. There’s equally nothing stopping companies from making their own independent pitch, especially where they have a solid track record in a particular sector or existing networks through which to disseminate their proposition.

However, there’s a great deal more to this process than simply saying “we need x thousand pounds to fund this idea,” and if this is a route down which you’re considering taking your business, you need to go in with your eyes wide open.

To begin with, how many investors are you looking for? The law of averages suggests that, if you’re successful in your pitch, you’re more likely to find a number of people who want to put in a small percentage of what you need rather than just one or two who want a large slice of the action.

However, there’s a direct correlation between the number of people you have backing you and the amount of administrative work that will be needed to keep them all up to date with how things are progressing, so the time and resources this will require needs to be factored into your calculations.

Also, if you are looking ahead to a potential exit, more investors can in some cases be more challenging.

Depending on the investment proposition you put forward, there might also be a range of Financial Services Authority requirements with which you need to comply.

If you do choose to work with a facilitator to help get your proposition in shape, make sure you’re fully aware of the fees and/or commissions that you will be liable to pay to them, and ensure you’ve fully investigated the tax implications of whatever proposition you put forward, both from your company’s point of view and that of your investors.

As with any commercial decision, before you take the plunge, take the time to find out exactly what you’re getting into before you get into it.

Stephen Slater, director at RMT accountants & business advisors

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