Crowdfunding: explained

Crowdfunding seems to be everywhere at the moment, but when you start looking into it, it’s easy to be confused by the option. It’s hard to tell who’s offering what, how much you’ll get as a return, sort the good from the bad and find out which one is best for your investment.

To make things simpler, we’ve split the generic topic of ‘crowdfunding’ into five separate categories. Essentially, the first three are ideal for an investment – there is the possibility of making a little – or a lot – of money. However, the last two categories offer no financial returns, so it’s worth looking out for the difference when considering where to put your cash.

1. Equity

Equity-based crowdfunding offers people the chance to invest in an unlisted company, in return for shares. If the company does well, their share will be worth more and they stand to profit. The opposite is also true; if the company fails investors can lose some, or all, of their investment.

Examples: The Link app, Cake app, Seedrs, SyndicateRoom, Crowdcube

2. Debt

Debt based crowdfunding, or ‘lending based’, is where the people give money to the business in the form of a loan. They will then eventually get their money back, plus interest accrued. Mini bonds are a form of debt based crowdfunding, where investors wil receive their money back at a set time when the bond matures.

Examples: Hotcha bond, Square Pie bond, Perception Bi, Crowdcube, FundingTree

3. Revenue

Revenue based crowdfunding is less common in the UK, and is really a branch of debt based. With a revenue loan, investors lend the company money which is then repaid as a percentage of company revenue. This is a more flexible option; there are no set repayment dates. If the company performs better than expected, the loan is paid back faster – if they underperform, there’s no pressure to pay back the debt by a certain date. So far, Crowd2Fund are the only platform offering revenue based loans in the UK.

Examples: Ruroc, Crowd2Fund

4. Rewards

Rewards-based crowdfunding offers people rewards in return for the money they give. This is often for projects or enterprises, rather than businesses in needs of finance. There are usually several tiers, whereby the more money they give the better the reward they receive.

Examples: The Crystal Maze experience, on Indiegogo, Shenmue 3 game on Kickstarter

5. Donation

Donation based crowdfunding is more like a form of charity, rather than an investment. There are many online platforms offering this, where people can ask for money for anything from college tuition to a project helping children in Africa.

Examples:, Justgiving



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