A $2.8bn global concept that's not yet in the dictionary

 

Together, these small pots are transformed into a sizeable sum that the business can use to grow. So instead of four dragons, as with Dragon’s Den, the business has hundreds or thousands.

 

This simple idea has the potential to finance the entire UK SME sector. It is a particularly appealing alternative for businesses now, as those applying for traditional loans from high street banks are more likely than not to be told “the computer says ‘no’”. Banks are not usually interested in lending below £2 million, and this is more than most small businesses want to borrow.

 

By connecting small, growing enterprises with people who might be interested in investing, whether for returns or just because they believe in the business and want to see it succeed, it also has the potential to generate profits for millions of small investors. 

 

And it has the potential to completely change the way we all think about money. 

 

It is already proving popular with investors looking for higher returns than the insulting rates they can get on cash in the bank. It is hard to overstate this potential benefit when you consider that only one in three high street banks provides an interest rate which covers inflation.

 

But it’s appeal for investors goes beyond the returns. Crowdfunding connects people. There is an emotion and an opportunity to transcend the simple, % interest, bland vanilla model we have all been stuck with. It embodies the “democratisation of finance” idea and could transform financial services from the old guard, 20th century institutions that have lost our trust into something that Simon Cowell would probably call “relevant” to our generation’s socially-mediated, Groupon culture.

 

With its diverse range of investment types, innovative returns, and engaging online experiences, crowdfunding is learning by doing. 

 

The traditional investment market in particular should be taking note. “Being rich is no longer part of the criteria to invest, ” says one crowdfunding chief executive. And this is the democratising bit: “investing” is perceived as something rich people do. But crowdfunding enables anyone with a spare £100 to invest, because their money is crowd-powered into a bigger pot, which can gain access to bigger and potentially better deals than that £100 could do on its own. And the low minimum investment amounts helps investors spread their money across more projects and platforms, so even smaller investors can diversify their risk.

 

For businesses, crowdfunding means potentially a lot more shareholders, which might seem an offputting amount of admin (there are ways around this. Seedrs, for example, acts as a nominee or single shareholder for investors). But already, marketing managers should see the opportunity that you do not get with a bank loan.

The ability to involve a large group of investors is a uniquely brilliant way of engaging people who are potential customers as well.  It is that word – engagement – that demonstrates one of the key ways in which crowdfunding appeals.

 

To invest, potential backers must like what you are doing but also believe they are likely to get a return. It is not meant to be gambling. Indeed, there is a debate over whether crowd-investing would be a more appropriate term for equity and debt platforms. 

 

So businesses using these sites need to be prepared to open their books and come up with some detailed plans on how to spend the funds (although there may be more leeway here for companies or projects whose aims are social rather than for-profit). 

 

This leads us to another advantage to investors: transparency. Learning about a business via a crowdfunding pitch means people can see where their money is going. More empowering than sticking it in the nearest e-saver. 

 

There are hurdles to the industry’s growth. The biggest has been regulatory. The Financial Services Authority (FSA), has to date required equity crowdfunding sites, for example, to limit participation to  “sophisticated investors ”.

 

The Crowdfunding Association is now engaging the Financial Conduct Authority (FCA) with the goal of creating appropriate and proportionate regulation for the sector. Regulation that achieves a balance between facilitating a flow of new capital to fund growth for UK businesses, and providing sensible levels of consumer protection. 

 

There are financial products out there with potentially far more damaging consequences to society. Does it really make sense that the same person can take out a personal loan with an APR of 1,000 per cent but can not put £100 directly into a business they like, or project they want to support: an investment that would give them a sense of satisfaction, possibly a small profit and boost the economy too?  

 

Visit the UKCFA website www.ukcfa.org.uk, or the peer to peer association, wwwp2p.org.uk, to find a list of crowdfunding platforms and get involved.