If you ask any business owner ‘what is the biggest issue they face in these times of austerity’, the most likely response will be: access to capital, or the distinct lack thereof. This, in turn, can have a devastating effect on the wider economy as is often reported in the press. A lack of investment from the private sector results in a weak job market.

Traditionally, any business, no matter what stage of maturity or growth they are going through, would turn to our old friend, the high street bank, for a loan. This cash would often be used to fund the purchase of equipment, to expand premises, for marketing purposes, or even to directly fund new staff members. Cash flow is the life blood of any company.

According to the BDRC continental SME finance monitor, as of the 3rd quarter of 2012, only 52% of applicants for loans and overdrafts were offered what was requested. A further 20% got what was requested but only after “issues” were experienced with the terms and conditions of the offer, such as a request for additional security or the interest rate not being desirable.

Now, it’s hardly earth shattering to hear that the high street banks have become notoriously risk averse since the beginning of the recession, and there seems to be no let up in sight. Could Crowd funding fill the huge void?
The concept:-
Crowd funding is essentially an offshoot from crowd sourcing, the basic premise being that a business or individual will have a need – either a service, development of an idea, content etc and will source their need via a large group of people. The most obvious advantages being that this can speed the process up and is often cost-effective.

This business model was transferred to the world of finance and has seen significant growth over the last few years, partly due to the monumental gap left in the market place by the banks. There are now many established providers offering two main forms of loan: debt (a traditional loan which can be unsecured or secured against property/assets), and equity (a stake in the business as a shareholder). Each holds its own risks and rewards.

These platforms are great for investors for several reasons, most sites will allow investments from as little as £5, meaning if you had £5000.00 available, you could invest in up to 1000 different business, spreading your exposure to bad debt. Types of investors range from private individuals with money spare who want to earn more from their savings, to businesses. Business to business loans are sometimes referred to as peer-to-peer lending.

Each business wanting money will go through a vetting process, both from a credit stand point as well as an assessment of what the money is going be used for and why. This again takes some of the risk out of the investment, as usually only a sound credit risk would be offered to investors in the first place.

Criticism:-
Naturally, this developing form of lending does have its critics; however, it’s mostly aimed at the “equity” side of the market. This is where an investor gains a percentage stake in the given company in return for the cash. The danger being that it can be quite difficult to value a business if it has little or no trading history, and a lot of the transactions are aimed at this end of the scale. Also, there is no guarantee that the money will be used for the purpose put forward.

It is not ideal for every business of course, the underwriting criteria can be fairly rigid, and if a company is not profit-making when applying for the loan, its likely to fail. This is not always the case with other forms of lending.

The future:-
2012 saw the formation of the first trade body for the industry, UK Crowd funding Association (UKCFA), offering better protection and guidance for all parties, as well protecting the interests of its members. The government announced plans for a new “regulatory framework” to further add credence to the sector, allowing it to venture into new markets. This has been welcomed by the main players with some calling for it to happen sooner.

The sector will continue to grow. Businesses will always need capital. Savers and companies with excess funds will always seek out the best return on their investment. Crowd funding is the best of both worlds. There are no limits for this emerging sector, and there is good reason to firmly believe that it will have a pivotal role in this countries economic recovery.