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The emergence of Crowdfunding as an alternative source of raising finance

Traditionally when management teams in charge of private companies required additional financing, they would have turned to banks, private equity or venture capital funders. More recently however, we have seen the landscape beginning to shift towards an alternative source of financing in the shape of crowdfunding.

In simple terms, crowdfunding allows ‘Creators’ to set out a proposal, concept or product brief together with a funding target and deadline. 'Backers' can then make a donation in return for ‘rewards’. Rewards can include the new product that is being developed, gifts or another form of financial reward. If the funding target is met, usually within a 30 day deadline, the funds are transferred to the company and the round of funding is complete.

There are a number of examples of successful crowdfunding raises in Northern Ireland. See.Sense, the Newtownards based cycling technology company, raised over £180,000 within one month via crowdfunding platform KickStarter. After only three years of business it has grown steadily and now supplies products to more than 50 countries around the world. Brewbot, a Belfast beer brewing technology firm, raised over £114,000 within one month via Kickstarter. However, following a period of difficult trading the company has since entered into an arrangement with its creditors.

For owners of SMEs it is important to weigh up both the advantages and disadvantages associated with crowdfunding. The major advantage that crowdfunding provides is the ability of companies to connect directly with ‘Backers’, allowing SMEs to finance themselves from diverse sources. It is also a fast and cost efficient way of raising finance and tends to attract the increased public exposure that accompanies a successful crowdfunding campaign.

The disadvantages must also be considered, however, and it must be remembered that unlike bank funding, crowdfunding is not protected by the Financial Services Compensation Scheme (FSCS). There is also a risk that funds promised by investors may never actually be paid over or the crowdfunding platform may be slow to process payments. Companies must also be wary that unprotected intellectual rights may be copied.

Crowdfunding is becoming recognised as an alternative source of raising finance for SMEs with an 8% rise in crowdfunded deals in Northern Ireland in 2016, taking the total level of investment to £27m over 14 deals. As the business environment continues to evolve, and as technology changes how we do business, owners and management teams should consider the new and alternative funding options that are available to them, and which option is best suited to the needs of their business.