Is crowdfunding the answer to your business's financing challenge?

crowdfunding.jpgAs the credit crunch and ensuing recession of 2008 began to bite, lending to businesses dried up. To their shock, even long-established, profitable businesses with solid banking relationships and unblemished records suddenly found that they couldn't get finance.

Subsequently, lending conditions have improved somewhat. For one thing, the government has made help for businesses a condition of its own assistance to the country's banks. The Bank of England, meanwhile, has launched a Funding for Lending scheme, whereby it explicitly lends money to banks, for them to subsequently lend to their business customers.

Even so, the banks remain very picky over who they will and won't lend money to. Long-established profitable businesses with solid banking relationships might be finding it easier to get funding to expand-although the owners may have to offer their homes as security.

But businesses without a long, profitable trading history-such as startups, or businesses hit by the downturn-might be for thinking that for all the government's rhetoric, not much has changed.

Except that it has. What's different about this particular credit crunch is that a new source of finance has sprung up: crowdfunding. Simply put, it's possible to obtain funding from individual investors, banding together to offer finance to businesses whose business plans they like.

And these individuals do so because-as we're all aware-the interest rates on offer from mainstream banks is at an all-time low. Lending to funding-starved businesses, in short, offers the prospect of a better return.

The chances are, you've seen the phenomenon discussed in the press. FundingCircle, for instance, is one such crowdfunder. Crowdcube and Seedrs are other reasonably well-known names.

Each has its own target market and business model. Some simply want to lend money to decent-looking businesses. Others want to offer funding in exchange for a stake-think ‘angel investors', and television's Dragons' Den.

It's different, for sure. But for businesses wanting money, and finding that their bank won't provide it, crowdfunding offers genuine access to finance. And for startups especially, it offers a genuine alternative to credit cards, and borrowing from friends and family.

Even so, businesses will want to approach crowdfunding cautiously. There are some obvious questions to ask-with answers that aren't always clear cut.

  • What options are on offer?
  • Should I just borrow, or offer equity?
  • What are the legal implications of accepting crowdfunding finance?
  • What obligations am I taking on, if I accept crowdfunding finance?
  • What information will I be required to share?
  • What does a crowdfunding contract look like?
  • How do I evaluate it, and is it fair?

Asking such questions is always prudent. But especially so at present. And that's because-as a new phenomenon-crowdfunding presently lacks a regulatory regime.

Granted, the Financial Conduct Authority (the successor body to the Financial Services Authority) has recently published a consultation paper on its proposed approach to regulating crowdfunding, describing how it proposes to balance the competing interests of businesses and the individual consumers who put up the cash.  

But this regime lies in the future-and businesses going into crowdfunding today, blindly, run the risk of getting it wrong. To the detriment of the business, and-potentially-to the detriment of the owners' own stake in their business.

But in reality, there's no need to get it wrong.

At The Legal Director, we specialise in providing clear-cut legal advice in business-friendly language. Providing it affordably, to suit a business's own needs and workloads. And in a range of offerings stretching from a fixed-fee monthly retainer starting at £100 + VAT for telephone advice, to your own part-time legal director, working alongside your own board of directors.

To find out more, get in touch.

Posted Monday, September 1st, 2014 by Warren Ryland



Other Articles In This Category