An introduction to crowdfunding for investors

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8 mins. to read
An introduction to crowdfunding for investors

As seen in the December issue of Master Investor Magazine.

You’ve probably heard a lot about crowdfunding. And how could you not? It’s been all over the news and social media after being used to fund everything from breast implants, to making cult films.

The practice isn’t a new one. Entrepreneurs have been raising money from their family and friends for years. And virtually everyone’s done a sponsored something-or-other for charity. It was only in the early 2000s that the term started being used. Since then, crowdfunding has gained traction and become a serious alternative form of finance, with figures raised on course this year to surpass VC and Angel funding levels (Forbes). In the UK alone, the market is expected to raise £4.4bn in 2015 (nesta.org), with globally more than 1,250 crowdfunding sites in existence (Massolution).

The given (and glamorised) side of crowdfunding is the ‘crowd’ bit: collective judgements, coming together to support (or not) great (or not so great) ideas. This is largely emotional, creates excellent stories and in most cases, is forgotten as soon as it’s over.

But behind the apple pie legends and hype, there are some of the most exciting developments in finance. These are the stories that don’t support the buzzword. If you ignore the headline-grabbing reward (Kickstarter) or donation (JustGiving) based crowdfunding, then you’re left with an altogether different proposition: crowdfunding for a return.

This a different kind of crowdfunding, which doesn’t take the crowd bit first. At its core are the principles of investing and earning returns. It’s smart, researched, has long-term and very real benefits to the investor and, most importantly, has revolutionary impact on the economy. It’s a serious investment vehicle.

And the next hope for the industry is that ordinary people, like you and me, with the help of crowdfunding can make more from their savings than at a bank.

By now you’re probably wondering how you can get in on the crowdfunding action. Well, we’re here to get you started.

 

How it works

Broadly speaking, crowdfunding for a return splits into crowdlending and crowdinvesting.

Crowdlending is about lending money to already established businesses or people. Here you can expect to see interest rates ranging from 3% to 17%. This can be done on platforms like Funding Circle, Ratesetter, Assetz Capital and ThinCats. Some people consider crowdlending to be the sensible option. It’s the warm coat your Mum tells you to take when you go outside of crowdfunding.

If lending is the warm coat of finance, then investing is the gorgeous pair of stiletto heels you risk breaking your ankle in. With crowdinvesting you either win big or lose big. Using platforms like Crowdcube, CrowdBnk and Seedrs you can buy shares in a company. Yes the risks are high, but that’s part of the fun. If you pick the right idea, the return can be huge.

To confuse matters, there are crowdinvesting sites that (in terms of risk) behave a lot like crowdlending sites. For example, Equity Property Crowdfunding sites like Property Partners allow investors to take stakes in companies that own and manage residential property – and as you can imagine, investing in bricks and mortar comes with less risk than investing in a relatively unproven start-up. So although it’s got equity in the name, this type of crowdinvesting is more raincoat than stilettos.

 

Where to start

The first crowdfunding platform launched over 10 years ago. Since then there has been an explosion in investment-based crowdfunding, with more than 200 dedicated websites launching in the

  1. And the numbers are growing – fast.

The types of investment crowdfunding are diverse: equity, lending to consumers, lending to businesses, invoice-trading, property – the list goes on. They all work in different ways and the hard part is picking the right one. There’s simply too much choice and not enough information. Here is a good place to start though. Here’s a rundown of the different types of crowdfunding you could try.

Equity Crowdfunding

Buying shares in early stage companies.

This is the most risky of the lot. Here you’re putting your faith in a young company to go on and succeed and eventually return some of your investment. It’s worth noting that many of these businesses do not succeed.

Try Crowdcube

Equity Property Crowdfunding

Buying shares in a company that owns and manages property on your behalf.

It allows you to invest in bricks and mortar and get on the property ladder without the pain of spending huge amounts upfront and managing it. You won’t just own part of the property at the end; you’ll also get rental income during the journey.

Try Property Partner

Lending to Individuals

Lending money to an ordinary person.

They may want to go on holiday, buy a car or pay university tuition fees. You’re unlikely to have any security (things you can sell of theirs if they don’t pay) so the risk is very closely tied to how creditworthy they are (how likely they are to pay you back). Despite this, these loans have seen some of the lowest default rates in the market.

Try RateSetter

Lending to Businesses

Lending money to businesses you like.

Often these businesses have been around for a while and should be making enough money to service the loan (pay the loan instalments that come due). These loans may have security that can be sold if the business doesn’t pay you back, but this is by no means always the case.

Try Funding Circle

Invoice Financing

Helping businesses with their cash flow.

Sometimes businesses are owed money but need the money immediately. In this instance, they can decide to sell their invoices on to other investors, in this case you. You give them the money now, and they pay you the original amount you lent back plus a premium. Happy days.

Try MarketInvoice

 

How to do it right

The key to successful crowdfunding is to make informed and responsible discoveries. Simply, do your research. Find out what people are saying about a business you are interested in and what others think of their business model. Ask your own questions. Be proactive – it’s your money.

Know your figures. Find out exactly when you might see a return and what else you might get from it. Will it be an equity share, dividends or interest payments? On top of this, find out how (or if!) your money is protected if the whole thing goes to pot. The business, project, or even the whole crowdfunding platform could collapse. Make sure if platforms have contingencies in place, or are actively looking at putting one in place. This is known as a living will – something investUP is working hard on to put in place.

Stick with what you are familiar with. While it’s good to branch out into projects and businesses you have an interest in, it’s always best to start with what you know. Your expertise will help you make great investments and decisions.

If there’s a type of crowdfunding that you particularly like, try using different platforms. There are loads of different websites all offering different things. Funding across multiple platforms gives you a diverse portfolio and greater experience.

Use different types of crowdfunding. Don’t just stick to one type if others suit your needs too. There is no reason why you can’t try both lending and investing, they both have different risks and benefits and can complement one another.

 

The Future

To us, the future lies in changing the way we use crowdfunding sites. That’s why we are launching the crowdISA – an ISA that works across more than twelve crowdlending sites. Think of it as a Cash ISA for the modern world.

At the moment, around 23 million people in the UK use the ISA tax wrapper to save – that’s 46% of adults. In 2015 alone £79 billion was put into UK ISA accounts (Gov.uk). But the Cash ISA has been due for an upgrade for a while now. Low interest rates have meant fewer people are using them and are looking for other ways to save and grow their money.

So the government has created the Innovative Finance ISA. The IFISA (rolls off the tongue, doesn’t it?) means people can crowdlend, ISA-style. Savers will now be able to lend money through an ISA, won’t pay any tax on their earnings and get all the plusses of an ISA (regular interest payments, actual ability to save) with a greater decent potential to earn (compared to the rather miserable and sad looking Cash ISAs in the market).

There’s a problem though: the Innovative Finance ISA only allows savers to use one crowdfunding site and still enjoy the tax benefit. Not good for choice and competition. It seemed to us that the Innovative Finance ISA already needs innovating – and that’s where our crowdISA comes in.

Through the investUP crowdISA, savers can use more than twelve crowdlending sites instead of the IFISA’s one. Like the IFISA, savers won’t pay any tax on earnings but the rates crowdlending can give are much better. Investors can lend money to businesses they care about, be part of innovation and earn money. Really, everybody wins.

As a parting thought, if you’re thinking that sounds like a lot of work then look out for our Robo-lending tools (automated lending tools) which will help you automate the lending process and take much of the legwork out of lending across twelve crowdlending sites.

 

About James

James Tuckett is a full-time crowdfunding evangelical and founded investUP in 2012. From an aerospace engineering and accountancy background, James has seen the power of the alternative finance sector at first hand. He is a keen believer that crowdfunding represents the new order in the finance sector.

 

About investUP

investUP brings the crowdfunding market together on one, investor-focused site. We are building a site which uniquely allows you to invest in deals from over 20 crowdfunding sites with a single account, and manage your investments via one centralised portfolio. Designed for you (retail investor), investUP, the world’s first FCA authorised crowdfunding brokerage, is revolutionising crowdfunding by providing people with wider choice, and increased simplicity and efficiency. Founded by James Tuckett, Dom Wolf and Chris Bradbury in 2014, investUP graduated from Startupbootcamp FinTech in 2014, launched at

Finovate in 2015 and was named a Hot 10 company in The FinTech 2015 list. investUP is backed by a board of leading industry experts including Barclays ex-Global Chief Operations Officer, Jim Milby; Phil Bruce, ex-SVP of Corporate Strategy at LSE; and UBS investment Banker George Granville.

For more information visit https://www.investup.co.uk


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