CROWD-FUNDING OR PEER TO PEER LENDING – WHAT’S RIGHT FOR MY BUSINESS?

09/09/2016

The terms crowd-funding and peer to peer lending are often bandied around as if they are inter-changeable. Certainly they both share the principle of raising finance from a number of people who invest together but in reality they are two very different options and work in fundamentally different ways. What will be a great option for one company may not work for your business.

According to data compiled by Crowd Rating:

• • In the last 11 months 678 funding campaigns have opened and closed on the top 12 platforms seeking a total of £250m. £196m was pledged and at least £145.5m actually raised.
• • On average 55% of campaigns succeeded, although success rates on Venture Founders and Syndicate Room were 78% and 72% respectively.
• • Of the campaigns that overfunded, the average funding amount was 134% of what was offered.
• • Of the 678 campaigns 390 were seeking £250,000 or less. Of these 210 succeeded in raising the money they wanted or overfunded.

Let’s look first at crowd-funding

Crowd-funding is the better option for start ups and companies in the early stages of growth.

Its likely that the first people you will have approached to fund your business (seed-funders) will be friends and family. By extending your call for funds to ‘the crowd’ you will soon see if others outside your immediate circle share your confidence in your product or service.

Crowd-funding is not as straightforward as peer to peer lending with two types of crowd-funding available – reward-based and equity-based.

Reward-bases crowd-funding, as the name suggests, means that instead of repaying your backers with cash you repay them with another kind of reward, usually items from the first batch of your new product or similar. In a sense it’s more like a kind of sponsorship but is has obvious advantages for a budding business – no loans to repay and your product gets out into the marketplace by early adopters who will spread the word about your company and products.

Equity-based crowd-funding is more conventional – entrepreneurs offer shares in their businesses in exchange for upfront investments. Investors bear all the risk; if the business is not successful, the shares will have no value. Again, statistics compiled by Crowd Rating conclude that an equity crowd funding campaign has a better than 50:50 chance of succeeding.

A question you may be asking is, how much is it feasible to try to raise: statistics indicate that if you try to raise £1.25m or more you have a 76% chance of hitting your funding target, but if you try to raise over £2m your chance drops to 67%. If you try to raise up to £1.5m your chance of success if only 54% (source: Crowd Rating).

So what about Peer to Peer Lending?

Peer to peer loans are usually funded by a number of different people – investors don’t own shares instead the reward is the interest that is paid on these loans. As an option this is more suited to established businesses of all kinds (limited companies, LLPs, and partnerships). You would have to provide your business financials and, depending on the size of loan required, security in some form will be required.

Generally, peer to peer lending is regarded as having a much lower risk for investors, not least because the companies are often more established (it’s a sad fact that many start up companies fail in the first year). Two other recent changes in regulations will also be attracting investors, especially in the light of the current low interest rates offered by more mainstream savings options:

• • investors will now be able to claim compensation through the Financial Services Compensation Scheme (FSCS) of up to £50,000 if they received advice from a regulated advisory firm to invest in peer-to-peer and lost money as a result – as long as that advice was received after 6th April 2016. Previously money invested in a peer-to-peer scheme was not covered by the FSCS.
• • The launch of the Innovative Finance Isa, which allows investors to invest in peer-to-peer lending in a tax-free Isa wrapper, at the start of April. These have yet to be fully regulated by the FCA so the launch has been delayed but once rolled out, will offer an alternative savings vehicle.

In these days when interest rates are at their lowest level ever, people with money to invest are looking beyond the traditional means of doing so and turning to more innovative solutions. Your company could be just what they are looking for.

We hope that’s shed some light on the field of crowd-funding and peer to peer lending. If you’re still unsure what is right for you, don’t hesitate to contact us and we will be able to advise and guide you through the maze.