Crowd Funding has a Key Factor that makes it Attractive to Firms Seeking Cash

The plethora of Government initiatives designed to stimulate lending to small enterprises and StartUps, seem to have mainly sunk without trace as the economic meltdown continues.

From Project Merlin, via the National Loan Guarantee Scheme and others including the latest initiative, Funding for Lending, they have largely been ignored by both banks and companies.

Throughout the downturn the banks have said they are willing to lend, and most commentators have claimed there is no shortage of finance, however business lending has continued to decline.

There seem to be two main issues that have caused the decline, firstly the banks are more cautious and want both security for the loans and business plans that demonstrate they will be repaid, and secondly companies remain uncertain with few applying for loans unless they are in financial difficulties.

Similarly investors have been somewhat absent from the market. Many have already been wiped out leaving those with cash very wary.

Despite the tax relief incentives offered under the Enterprise Investment Scheme (EIS), and for StartUps, the Seed Enterprise Investment Scheme (SEIS), there has been little interest. This lack of appetite can be explained by the stringent pre-qualifications. In the case of StartUps, SEIS investors may qualify for 50% tax relief on up to £100,000 however the HMRC guidance notes may help explain why no one is excited: http://www.hmrc.gov.uk/seedeis/index.htm

There has however been much excitement over a newer funding alternative called “Crowd Sourcing” or “Crowd Funding” since the launch of the UK version of the US enterprise Kickstarter on 31 October 2012.

While Crowd Funding may prove to be a good option for many firms, StartUps in particular should do their research. Kickstarter, for example, is restricted largely to creative projects that have a defined beginning and end and its website clearly states: “Starting a business …does not qualify as a project.”

This innovative type of funding is becoming more common. There are already several finance providers each with its own criteria and the number is likely to grow as investors and lenders put up more cash.

The Crowd Funding providers appear to have one common factor that makes them attractive to firms seeking cash. They make it simple to apply for finance, whether debt or equity.

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