Crowdfunding

Crowdfunding is an online appeal for investment where many people each contribute a small amount towards a funding target. The enterprise sets a target amount and a deadline on a crowdfunding platform. Members of the public then pledge money, often in return for a reward, a product or a share of the business or its profits.

How a campaign works

Suppose you want £5,000 to make a new card game. You set a £5,000 target and a 30-day deadline. Supporters might pledge £15 to receive a copy of the game when it is made. On an all-or-nothing campaign, funding is only released if pledges reach £5,000 before the deadline.

Advantages

• It can raise finance quickly from a large pool of investors, instead of relying on one bank or one investor.
• It may involve no interest payments and sometimes no fees, because supporters are not lending money that must be repaid with interest.
• It can be an alternative source when banks refuse finance, for example if the enterprise is new and has little trading history.

Disadvantages

• When pledges fall short of the target, no money is released and supporters are refunded. All the effort can therefore produce no finance at all.
• The business idea may be copied if it is not protected by copyright or a patent, because the campaign is public and anyone can see it.
• Time and money are needed to launch and run the campaign. Reputation may also be damaged if the target is missed in public.