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The quick guide to crowdfunding your side project

The quick guide to crowdfunding your side project

Peer-to-peer (P2P) lending is a market on the rise and there are ways to use it to fund side projects, says Nick Moules.

Crowdfunding, crowdlending, peer-to- peer lending and P2P lending are all terms used to describe the act of a business or individual obtaining finance from private individuals rather than a traditional source of finance, like a bank.

It's a market on the rise and there are ways for web designers and developers to tap into its offering. The trick is identifying the right type of finance and positioning your application appropriately. Reward crowdfunding, familiar to those who know Kickstarter, is a way of accessing cash in return for a unit of whatever is being produced. This works particularly well for video game designers who can access a community of people who already play games and would like a new one. For the cost of a game, individuals can pledge cash to a project, which is then completed and everyone who donated receives a copy. The business can re-invest leftover cash and grow.

In the UK, equity crowdfunding is becoming big business. Companies, typically startups, create a profile on a provider's website and pitch their ideas to the provider's community of investors. If successful they win vital investment and a group of stakeholders with a keen interest in their venture.

Similarly, peer-to-business lending allows creditworthy businesses to secure a loan from the crowd and receive additional marketing benefits. Several hundred people who did not previously know about your business can now recommend you to others and will be motivated to buy your product or service. It's powerful stuff.

In the UK, Zopa began facilitating loans between individuals in 2005. In the US, Kickstarter, the biggest name in the reward crowdfunding space, started in 2009. Lending to businesses has been running in the UK for the last three years. The big players are Funding Circle, rebuildingsociety.com, ThinCats.com and Funding Knight. Investing in businesses in return for equity has been pioneered by Crowdcube as well as Seedrs.

Is it safe?

The major risks in this industry are taken on by the donators, lenders, investors and the hosting websites. A fraudulent application or a poorly run business can result in lost cash and reputational risk for the platform that hosted it.

There's a requirement for everyone who wants to access capital in this exciting new market to act responsibly. To date, there have been relatively few fraudulent applications, but if they become commonplace it will harm the reputation of the industry and funding could dry up quickly.

The type of funding available depends on the status of the business. If it's an early stage startup, reward crowdfunding may be the best option. If you've crunched the numbers, have a business plan and a clear idea of your direction, equity crowdfunding could be right. If you're an established business looking to grow and move to the next level, a loan would keep precious equity in the company. The one area of the market yet to really be tapped is sole traders: designers and developers who work freelance.

You could also apply for a personal loan to get your business up and running. Zopa and RateSetter offer some of the best deals on the market.

Getting your application right

When applying for funding, be honest and transparent. You'll need to create a pitch video and be prepared to respond to questions about your business plan from would-be supporters through an online forum. Many investors are experienced, and although they want to support new businesses, they want a return on their money and will scrutinise applications. Whether you successfully raise funding is also down to momentum.

The marketing aspect of this type of funding is incredibly valuable and should be maximised because it can help generate your first customers. You don't get that sort of value from a bank.

Words: Nick Moules

Nick Moules is marketing and communications manager at rebuildingsociety.com.

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