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10 Top tips to ensure your crowdfunding efforts are rewarded

September 10, 2015

Business owners that are exploring some of the newer business funding options, commonly referred to as ‘Alternative Finance’, can sometimes struggle to distinguish between ‘crowdlending’ and ‘crowdfunding’, not least because they sound remarkably similar.

Both describe ways of raising business finance, but there are huge differences between the two which need to be clearly understood to avoid any tears at a later stage.

So how do crowdlending and crowdfunding differ, and what opportunities do they offer start-ups and small businesses?

The difference between crowdfunding and crowdlending

In broad terms, crowdlending is a way of raising ‘debt’ finance – that is, money that has to be repaid according to agreed terms and conditions, just like a bank loan.

For a detailed guide to raising money through crowdlending read, How peer-to-peer lending offers startups and businesses a new funding option.

Crowdfunding, on the other hand, is money that does not have to be paid back, but instead is exchanged for shares in the business.

In return for their money, the external investors will usually be looking to receive dividends and/or make a capital gain at some time in the future as a way of recouping their initial outlay and making a profit.

Both crowdfunding and crowdlending are relatively new to the financing landscape but both are rapidly growing in popularity.

With many startups and small businesses finding it difficult to secure funding from traditional routes, they are increasingly turning to the crowd in their search for finance.

Raising business funding from peers

The rapid growth of crowdfunding and crowdlending is also being driven by investors and savers who are looking for higher returns on their savings than they are currently getting from banks.

Both crowd funding and lending are speculative investments for the individuals providing the funds. Crowdfunding, in particular, is not for the faint-hearted or for those investors who cannot afford to lose all of their money if things go wrong.

Bearing this in mind, it stands to reason that if you are an entrepreneur trying to raise money from total strangers you have to set out your proposition very carefully indeed if you are to succeed in raising the funds to launch or grow your business.

10 Top tips to successfully raising money through crowdfunding

Such is the current popularity of crowdfunding that there are countless professionals and savvy amateurs out there sifting through the best propositions in a bid to find the corporate stars of tomorrow.

There are no soft touches or easy sells and businesses looking for money will almost certainly be subject to rigorous scrutiny.

If you’re considering raising finance for your business through crowdfunding, here are ten top tips to help you succeed;

1. Produce a compelling business plan

The success of your proposition will depend very heavily on the quality of your business plan – don’t be tempted to dismiss this as a tiresome formality and try to cut corners.

It needs to be structured, detailed, accurate, realistic, professional, but, above all, compelling. Anything less and you will fail. Once the plan has been produced to your own satisfaction, show it to a professional.

If you need to find/borrow the money to pay the necessary fee, then so be it. This is not needless extravagance, but a good investment because if you can’t convince your own adviser, chances are you won’t be able to convince anyone else either. It will be money well spent.

You’ll find detailed help on producing a business plan to win over outside investors in, ByteStart’s Guide to writing business plans for business angels and outside investors.

2. Be clear on your competition

When addressing the subject of competition in your business plan make sure to think laterally – be especially careful to resist the notion that you have no rivals because that is almost certainly not true.

It may just SEEM that you have no immediate competition, but it may come in different guises. For example, if you are thinking of opening a restaurant you could find yourself competing against pubs, music venues or working men’s clubs.

3. Learn from other people’s experiences and mistakes

Take every opportunity to pick other people’s brains and learn from their mistakes rather than wait to make your own. One way to do this is to join a ‘seed camp’ or an incubator.

The experience will enable you to bounce your ideas off of other like-minded people who have been down the same path and whose constructive criticism should be taken seriously. It is so easy to be so close to your own idea that you become blind to what others see. Listen and learn.

4. Choose the right funding route for your business

Research the types of fund-raising available to you.

If your business is new, it is unlikely that crowdlending (i.e. debt finance) will be an option because you will have no credit record or be in any position to provide proof that you will be able to pay the money back out of trading revenue. Crowdfunding (equity), or reward-based finance may be your only viable options.

5. Actively promote your fund raising efforts

Don’t just rely on a website to attract all the investors. Visit angel investment networks and actively promote your proposition – there is no substitute for spreading the word yourself.

6. Compare the various crowdfunding and crowdlending websites

When selecting a crowdfunding site to promote your idea, don’t go for the first one that looks okay – if possible, engage with several. Look at the charges, the traffic they generate and the events and promotions the sites use to promote their offers.

7. Prepare to deliver a great presentation

Having selected your funding platform, expect to be asked to present your proposition both to the site and to any prospective investors who may consider putting up the money.

You will need to make a strong, well-argued and professional case and be prepared, too, for probing questions. Be prepared.

For help on presenting a compelling case, read these guides;

8. Respond to feedback

Don’t be put off by criticism, but, equally, don’t ignore it either – learn from it and use it to strengthen your case.

9. Read the smallprint carefully

When success seems tantalisingly close, don’t rush to sign up at all costs. Check the terms of conditions of any shareholders’ agreement and be prepared to challenge details you don’t understand or that make you feel uncomfortable.

These documents are binding on all parties and it is vital that everyone is happy, including you. After all, you may have to live with the consequences for a considerable period of time.

10. Protect yourself

If you feel that your idea is unique, you should look to protect your Intellectual Property before revealing it to potential investors, or anybody else.

Getting a patent is one way to do this. It can be quite costly but if you disclose an invention to the public, it will not be regarded as new and as a result you will then not be able to patent it. You can find out more in, Intellectual Property – A summary of IP law for small businesses

Non-Disclosure Agreements (NDAs) are another way to help protect yourself. Some investors may resist signing such a document because they feel their probity is being called into question at a time when you are asking them to put their money at risk, but you can always ask.

This can become a sensitive issue so a mixture of caution and common sense from all parties should become the order of the day.

About the author

This guide has been written for ByteStart by Sacha Bright, founder and CEO of Businessagent.com, the UK’s first and only debt and equity crowdfunding aggregator.

More on financing your business

You can find help and tips on all aspects of business finance on ByteStart. Here are a few of our popular business funding guides;

And these will help you manage your cash flow;