Surge in crowd funding won’t fill the void

There has been an upsurge in crowd funding as a result of confidence in banks being at an all-time low, coupled with lack of business lending, meaning it is gaining popularity among start-ups and established businesses in financial distress. However, we don’t feel this will fill the void or provide a sufficient finance resource for businesses as the crowd funding movement is still in its infancy and not currently in a position to challenge the banks for mainstream funding.

At Adams Moore we have built up a wealth of experience in dealing with organisations that can be termed ‘crowd funders’, who are willing to lend their cash to businesses because of the better returns on their money due to interest rates being so low at present. But with interest rates charged, being typically around 10 – 20 per cent, dependent on risk, they certainly don’t offer an attractive deal compared to banks, which are still the cheapest source of finance.

The banks’ reputation has suffered due to PPI, fixing LIBOR and mis-selling of SWAPS to name but three, understandably leaving trust in the banking system at an all-time low, and we have heard stories of the banks cutting funding facilities overnight and being unresponsive to requests from businesses to increase or re-finance their credit facilities. But by far the most frequent complaint we hear from our clients is the lack of funding for business.

Therefore, we believe crowd funding should be a back-up plan rather than a first port of call for funding, and businesses should focus on four key elements to increase chances of funding from any source; up-to-date statutory accounts, being up-to-date with HMRC payments, having a credible business plan including business forecasts on turnover, profit and cash flow and up-to-date management accounts in place with comparison to budget. This optimises chances of getting funding at the lowest rate of interest.

For start-up businesses, or businesses that has experienced losses over recent years with low financeable assets, and no director personal equity to put up as guarantee, then crowd funding can be a great option as long as the interest rates are factored in. However, following the aforementioned important factors increases the chances of funding significantly and enables any potential funder to understand the business and lower any perceived risk, therefore lowering interest rates.