The UK crowdfunding scene can no longer be seen as some sort of cottage industry. Analysts value the market at £3.2bn and, in 2015, over £370m was advanced to businesses via crowdfunding platforms, so what does the market actually look like, and what happens next?
Crowdfunding comes in a few forms. You have some platforms which help businesses raise debt or equity finance, you have platforms that raise funds with no real expectation of monetary return on the part of those advancing the funds – Kickstarter being an example. Then, you may also see companies raising finance from the crowd directly in exchange for rewards (and perhaps a monetary return too), this has proved popular and effective amongst food & drink retailers – beer, wine and chocolate are some examples that spring to mind.
For Recruitment businesses though, it’s really about either the debt platforms or the equity platforms. Debt based operators like Funding Circle have been around for some time now, providing term loans along the same lines as banks have always done. The model works with your credit proposal being approved by Funding Circle. Its network of lenders then decide whether they’d like to lend to your business, and if so, how much and at what rate of interest. If your proposal proves popular then it could be that the amount of money people are prepared to lend exceeds your requirement and if that happens then the blended rate of interest works its way down.
In the world of invoice discounting, which of course is of particular relevance to recruiters, you have operators like Market Invoice with whom you can get an advance on a single, or a selection of, sales invoices. Essentially those invoices are put up on their platform and, again, lenders decide what rate of interest they are prepared to charge. If you’ve got a blue chip customer base that interest rate can get pretty low. Depending on your circumstances, this may be a genuine alternative to setting up and then maintaining a CID facility with an asset based lender.
On the equity side of things, Crowdcube is one of the leading lights. It’s a similar process to the debt platforms in that you still specify what you want to raise, and for what purpose, but there is no auction, the price of the equity is set at the start and it’s then a case of all or nothing – you either raise the full amount and are therefore funded, or you don’t and you’re not. The cost of equity is naturally higher than the cost of debt so this is certainly not something to enter into lightly, and for well run recruitment businesses its difficult to see why you would at all.
Some of the top tips when considering looking at crowdfunding are:
- Don’t take the process lightly, and expect the platform (and perhaps some of the lenders/investors) to ask some or all of the questions that a bank or private equity house would. They won’t want to feel as if they’re throwing their money away, and questions that go unanswered may give them that feeling.
- Really understand the key documents, for example the loan facility agreement or the investment agreement, and what happens at key stages e.g. if you default on a loan, or you want to exit the business.
- Take advice on how much this is costing you. It may, on the face of it, appear cheaper to obtain finance via one of these platforms, but watch for hidden costs in the set up phase and beyond.
- If you can get some family and friends involved in setting the ball rolling when you list on one of the platforms, observers have noted a herd mentality with money attracted to listings which already have some momentum.
If you would like to discuss this further, please feel free to contact me or Stuart and Marie on 01462 687333.