What is crowdfunding?

Esther Shaw / 25 March 2015

Crowdfunding is a way to raise funds for a new business by asking lots of people to invest smaller amounts of money into the venture. Esther Shaw explains what crowdfunding is and how it works.

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.

While crowdfunding is still in its relative infancy, it is becoming 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 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.

Read our seven tips to make crowdfunding a success.

But is it regulated?

Last April, 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 are now working together, through bodies such as the UK Crowdfunding Association, to introduce common standards and values.

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

That said, the FCA continues to urge potential investors to proceed very 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.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.