What is crowdfunding?

If you are looking to fund a start-up and are finding it difficult to get a loan from a high street bank, you may want to consider crowdfunding instead.

This is the innovative model through which both new and established entrepreneurs can raise capital.

Crowdfunding has in recent years established itself and grown into a very popular option for those looking to get a fledgling business off the ground.

But how exactly does it work?

If crowdfunding isn't for you, there are other ways to raise funds for a new business.

Raising money from ordinary people

Crowdfunding is a way of raising finance by asking a large number of ordinary people – the “crowd” – to each contribute a small amount.

Investments could be as low as just £5 or £10 and could come from hundreds – or thousands – of different people.

These contributions are then brought together online into one big fund.

Building a crowdfunding community

If you are considering crowdfunding as a serious option, you need to be aware that as well as using a platform to raise capital, you are using it to raise a community.

The key to successful crowdfunding is finding enthusiastic, like-minded followers who will not only support your start-up financially, but who will also help to provide advice and spread the word to other people.

What sort of ventures are being crowdfunded?

Aside from supplying loans to small, growing businesses, crowdfunding is now being used to raise finance for all sorts of schemes.

This includes charitable and arts projects, consumer-based businesses, such as cafes and pizzerias, renewable energy schemes – and even the property market.

But is crowdfunding regulated?

Back in 2015 the Financial Conduct Authority took on formal responsibility for policing crowdfunding platforms, and built a regulatory vehicle for the industry.

Further to this, some platforms started working together, through bodies such as the UK Crowdfunding Association, to introduce common standards and values.

Moves such as these were all steps in the right direction, and went some way towards boosting confidence in this sector, making it easier for entrepreneurs to get ventures off the ground.

That said, the FCA urged potential investors to proceed cautiously.

Crowdfunding is risky – but also offers potentially big rewards

As an entrepreneur, it’s important to understand that crowdfunding is extremely risky for those putting money in, as there are no guaranteed returns – and a high chance they could lose out if your start-up doesn’t fare too well.

That said, if your company is successful, investors stand to make a what could potentially be a very big return.

Learn more with these seven top tips for crowdfunding a new business:

If you are looking to start up your own business, you may be exploring different ways of raising capital.

Crowdfunding is a fast-growing sector, and one that you may be keen to tap into.

But if you do decide to go down this route, you need to proceed very carefully, as there will be a lot of other new ventures competing for the attention of potential investors.

Here are a few tips to help you crowdfund effectively.

Not sure crowdfunding is for you? Read our eight ways to raise money for a new business.

1. Stand out from the crowd

When trying to raise money from the “crowd”, you need to hone your pitch so that it has widespread appeal.

While investors will like the idea of supporting a growing business, they will be comparing lots of different ventures online so you need to make your idea stand out from the crowd.

Whatever you do, don’t use jargon. Explain things as simply and clearly as you can, and use plain English at all times.

2. Put in the hours

The worst mistake you can make is thinking that raising money will be easy.

It is real work and requires hours of hard graft.

Be prepared to put in the time needed to doing your research so that you become an expert. That way, you can fully engage the investor community and get them to buy in to your idea.

Try to come up with informed answers to the questions you could potentially get asked, and expect to interact with potential funders on an almost daily basis.

3. Show some personality

Bear in mind that investors are more likely to buy into a personality, so try and be interesting and engaging.

Develop a narrative so that you have a story to tell – and do your best to be original.

4. Be passionate

Show lots of passion for your idea, as this will help investors get passionate about it too.

Harness this enthusiasm, as like-minded followers may even be able to provide advice and open doors – and this could be invaluable.

But how does crowdfunding actually work? Read our guide.

5. Transparency is key

Don’t try and pull the wool over the eyes of your investor community. Transparency is key to the crowdfunding process.

6. Get family and friends involved

Talk to family and friends and get them to help you kick-start the funding process.

If potential investors see that other people are showing an interest, this will make them more likely to jump on the bandwagon.

Equally, if your nearest and dearest are reluctant to invest, think carefully about whether your new venture really is as good as you think it is.

7. Make use of feedback

Potential funders will rake over your idea in great detail during the crowdfunding process, and are likely to tell you exactly what they think.

While it may be hard to take criticism, you should take all this feedback on board, and try to see this as a positive.

After all, comments and thoughts from investors should help you make your business even better in the long run.