Crowdfunding is a way of raising money for a business venture, personal endeavor, or charitable cause, where a large number of people invest in or donate money to the cause.
Crowdfunding is becoming more popular with startup and early-stage businesses which can often struggle to secure funding from traditional lenders such as banks or financial institutions due to lack of trading history.
As the name suggests, crowdfunding is about engaging a crowd of people to co-fund a particular project. Funding for say, a startup business, can be provided by hundreds or even thousands of individual investors. They all come together to provide money to get a project off the ground and all share in the risk or reward of that project.
Did you know BrewDog is a famous example of a Crowdfunded business?
What Options Are Available?
Crowdfunding works well in today’s social media-driven environment as it’s all about telling a story and inspiring people to invest in your particular venture. There are different types of crowdfunding including donation-based crowdfunding, equity crowdfunding, and debt crowdfunding.
- Donation-based crowdfunding is where people simply give some money to a new venture. Those who donate often get something tangible in return, such as being one of the first customers to receive the new product or service.
- Equity crowdfunding is popular with business start-ups as it allows the new business to offer some shares in exchange for incoming capital.
- Debt crowdfunding allows individuals to act as private lenders. Those lenders can spread risk by pooling their funds to lend to a wide variety of businesses.
The debt must be repaid and the repayments usually happen on a monthly basis.
Popular crowdfunding platforms in the UK include Crowdfunder, JustGiving, Crowdcube, and Funding Circle. Different platforms suit different needs so it is worth doing plenty of research before deciding on using a particular crowdfunding platform.
The experts over at Crowdcube have a selection of handy tools to help you build a successful campaign and with the site suggesting that the target investment for a business in the food and beverage sector is £86,688, it’s advisable to prepare a professional campaign to access the vast potential of this funding method.
Are There Any Tax Implications?
Donations to businesses are likely to be subject to income or corporation tax, it is, therefore, advisable to contact us at MJB Avanti (08000) 388 799 to discuss the often complex tax implications.
For debt crowdfunding, you may need to retain 20% income tax on the interest gained.
In respect of equity crowdfunding, dividends received by an investor are subject to income tax. Shares are typically purchased either to support your business or with a long-term view to gaining a return on investment when selling the shares.
If you’re considering Crowdfunding to raise capital for your new venture, contact the team at MJB Avanti (08000) 388 799 to discuss the options and tax implications for you and your business.