Crowdfunding

Crowdfunding raises finance by collecting small amounts of money from a large number of people, often through an online platform. Each backer gives a little, and together the amounts can reach the target. The money is not a loan from a single investor: the business usually offers a reward, such as a first version of the product, rather than repaying the money as it would a bank loan.

For example, a small business selling recycled stationery kits might ask for £5,000 on a crowdfunding platform. It offers backers a notebook set at a reduced price, and the platform takes a fee from the money raised.

Benefits

A campaign can be set up online quickly and shared widely, so it can reach a large number of people. It can also help with marketing, as the campaign page tells people about the product and may be shared on social media. It lets the business test public reaction: lots of backers suggest strong demand, while a weak response warns the owner before they spend more. It also raises finance without adding debt, which suits an owner who cannot get a bank loan or does not want one.

Drawbacks

It takes work to attract backers. The owner must build interest with a clear description, updates and messages, and may still fail to reach the target; many platforms release no money if the target is missed. A public campaign can also let another business see the idea and copy it. Finally, platform fees and the cost of making and sending rewards reduce how much of the money the business keeps.