Crowdfunding for Beginners

Wednesday August 31, 2016

Crowdfunding is the new bank loan! Well, not exactly - but it does have a lot to offer if you go in with your eyes open.

It's everyone's favourite financing solution for that anti-matter hypercollider you've been tinkering with for years but never quite perfected! Literally billions of pounds have been raised "in the wild" on crowdfunding platforms. They're an incredible resource for small businesses in every field, but they come with costs and risks you might not be prepared for. Here's a quick crowdsurfer's guide to getting your feet wet.

You've got a lot of choices when it comes to crowdfunding - both in platform and format. Everyone's getting involved, from board game companies launching ambitious new projects on Kickstarter to video bloggers and specialist-niche journalists earning their livings on Patreon. The chances are, whatever you're looking to accomplish, there's a crowdfunding option to suit you. Given that traditional lenders are still slamming their doors on about half of the applications they get from small businesses, you can see why those new options are getting so much attention.

So, what does it take to get your graviton-powered personal transport pod off the ground through crowdfunding? Well the first thing you'll need is a down-to-earth plan. That means being completely realistic about how much cash you'll need, and how you're going to spend it. A lot of promising projects crash and burn because they made promises they could never keep, or offered rewards they couldn't afford. Learn everything you can from the bones of the noble, ambitious failures who've gone before you. For instance, getting your protoypes perfected won't help you if your production run budget bleeds dry on postage costs.

The next thing you have to do is get the world as excited about your project as you are. You can go a certain distance on just the good will of friends and family, but you'll almost certainly need more to get where you're going. Your pitch needs to explain exactly which star you're following, and why it's worthwhile shooting for it. You're in business because there's something you're passionate about. If you're expecting people to shower you with money to chase your dream, they need to know why it's important, and what they'll get out of it. That's true even if all you're actually offering is the chance to get involved in something meaningful, interesting or just plain cool.

That leads us onto some of the more dangerous ground. If you're offering rewards to your backers, don't assume the taxman won't show an interest. HMRC may very well consider those rewards to be sales or pre-orders. As a matter of fact, even if you're only offering backers a metaphorical "warm glow" in return for their money, you might still find HMRC sniffing around. There's a big difference between informally raising cash for a personal goal and running an actual business - but there's an ocean of grey areas in-between. If you're not declaring your crowdfunded "donations" as taxable income, you might be sailing into trouble if the taxman thinks you're trying to dodge him.

The other big thing to watch out for is failure. Crowdfunding backers are generally aware of the chance that your project won't ever come to fruition. That's doesn't mean they'll be happy about it, though. In the era of social media, a bad reputation on a crowdfunding platform is difficult to shake off. You've also got to consider the consequences if you don't reach your goal in the first place. What happens next can vary with the platform you're using, but you definitely need a plan B.

Speaking of which, remember that quitting after a failed crowdfunding attempt is just as bad as giving up the first time a tradition lender says no. You can always re-tool your project and come back stronger, or find another way altogether. Crowdfunding is just one of the new "alternative funding" methods businesses and individuals are experimenting with. Business angels, business accelerators and peer-to-peer lending platforms all have their places in this new game. The better you know the playing field you're on, the closer to the goal you'll be.

Got questions about crowdfunding? Not sure how to report your project's income to HMRC? Get in touch for answers and advice - and keep listening out for more Voices from the RIFT.

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