The rise of digital platforms has made it possible for businesses to raise finance directly from their end customers. Bypassing traditional channels, crowdfunding has grown in popularity in recent years and become a go-to solution for new and existing businesses.
Is your business considering it as a finance option? Before embarking on your own round of crowdfunding there are some crucial points to consider.
First, understanding crowdfunding and its implications is key. Traditionally the finance of a new business, capital project or specific event requires a business to approach a small group of investors for a large sum of money, while crowdfunding targets a large number of investors to each invest much smaller amounts.
Through the internet a business can reach its end customers and those potentially interested in their offering and ask for investment while providing incentives for doing so. These incentives may include the purchase of equity, so loyal customers can watch the value of their shares grow – Brewdog has had great success with this model through its ‘Equity for Punks’ scheme – or they could simply offer the opportunity for stakeholders to donate to a cause they care about in exchange for future rewards. The benefit for the business undertaking the crowdfunding is the opportunity to receive the funds with minimal or no short term cash repayments.
The brewing sector has been pioneering in its use of crowdfunding. As an industry it offers some good examples of crowdfunding in action, as its customers have wholeheartedly supported its efforts. In the last year, Brewdog’s latest round of funding brings the total raised through ‘Equity for Punks’ to over £80m, allowing the craft beer giant to expand its brewing capacity and increase its international reach. Whilst Fierce Beer raised £121,000 to open a brewery bar in Aberdeen city centre, the Northern Monk Brew Co and St Andrews Brewing Co raised £1.4m and £600,000 respectively to expand production; and Loch Lomond Brewery raised an initial £550,000 to double their production and begin working towards a move into a brand new brewery and visitor centre by 2020.
With results like these, crowdfunding appears an attractive proposition. However, there are some key issues to consider:
- Do you have the cashflow to make repayments if necessary?
- Are you at risk of reducing your control of the business by diluting your shareholding?
- Is there a risk that the rewards offered to investors have an unplanned VAT impact on your business?
There are clearly many issues to consider when looking at crowdfunding and it is important to address them all. Having all of the facts will enable you to assess if this revolutionary finance solution is right for your business.
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