Equity crowdfunding

Quick facts

Equity crowdfunding is a type of equity finance whereby people (‘the crowd’) invest in an early-stage unlisted company, in exchange for shares (equity) in that company. Individual investors thus become shareholders and stand to profit if the business does well – they might also lose some or all of their investment. Equity crowdfunding usually takes place over an online platform.

With a good crowdfunding campaign, you can access potentially millions of people via one of the many crowdfunding sites.

Individual investors who put money into your business can offset some of the risk involved with investing in early-stage companies via two government tax relief schemes – the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

You might also want to consider debt crowdfunding – more commonly known as peer-to-peer-lending (P2P). Peer-to-peer lending (P2P) is a type of business loan by a large number of private investors (individuals, businesses or institutions) to your business, usually through an online platform. The idea is that lenders and borrowers get a better rate than they would through banks – plus decision lead times are significantly shorter. P2P is also known as debt crowdfunding or loan-based lending.

Peer-to-peer lending (P2P) is different to standard business loans. P2P matches private investors looking to invest their money with people who want to borrow it. In theory, compared to banks, P2P pays higher interest to lenders and charges lower rates for borrowers. The stronger your business profile, the lower the interest rate on your loan.
 
Other types of equity finance – Equity finance refers to the capital an external investor injects into your business in return for a share of ownership (equity) and/or some control of the business. Equity finance investors therefore have a claim on your future earnings but, in contrast to a loan, you don’t pay any interest – nor do you have to repay capital. If you opt for equity financing, you’ll sell a stake in your business in return for funds. This is in contrast to debt financing (e.g. a loan or a bond) where you take out a loan and pay it back over time with interest.

Angel investors (business angels). Business angels are private individuals who are prepared to put their own money into start-up or early-stage businesses in exchange for a share of the company’s equity (i.e. equity finance). Angels may invest on their own or as part of an angel network. Typically they are experienced entrepreneurs and, in addition to money, they bring their own skills, expertise and contacts to the table. Business angels plug some of the funding gap that can exist between banks and venture capitalists, usually investing sums of between £50,000 and £500,000.In contrast to venture capitalists, business angels are more inclined to invest in start-ups and early-stage businesses. They may also be more flexible in the way they finance a business because they will have a less rigid time frame for exiting a business (i.e. sale or IPO).

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