THE BLOG

Talking About a Revolution - Crowd Will Take Power

11/08/2015 08:51 BST | Updated 10/08/2016 10:59 BST

When I decided to launch a crowdfunding business in 2013, various people warned me that it might turn out to be a fad - a flash in the pan. The doubters appear to have been wrong. Crowdfunding in all its forms is going from strength to strength and it is definitely here to stay.

Of course, crowdfunding is not a new concept. Stock markets are in effect a form of crowdfunding with individuals or institutions having fractional ownership of companies. Property funds are also a form of crowdfunding - investors put their money into the fund and the fund then buys a large office block or a shopping centre. Electronic platforms have now made it possible for 'the crowd' to fund individual projects like the making of a short film (Kickstarter), provide equity finance to start-up businesses (Crowdcube and Seedrs) or lend money to companies (Money&Co. and Funding Circle). Or you can lend money to individuals (Zopa).

With each of these models, the crowd gets different returns. With rewards-based crowdfunding (Kickstarter), they might get to go to a screening of the film that they have financed, but they have no financial interest in the project. With equity crowdfunding, they own part of the business. In the UK, investors may get attractive tax incentives if the company has Seed Enterprise Investment Scheme ("SEIS") approval or Enterprise Investment Scheme ("EIS") approval. With debt crowdfunding, if money is lent to individuals (Zopa) or companies (Money&Co. and Funding Circle), then the crowd gets a rate of interest on its money (8.9 per cent gross currently on the Money&Co. site across all the loans made so far).

In terms of risk, rewards-based crowdfunding carries none: you are contributing to the funding of a project and expect no return as such, although I suppose that the manager of the project could fail to provide the reward.

With equity crowdfunding, there is a risk that you could lose all of your money, although you can offset that loss against tax if the company has SEIS of EIS approval. Quite a high number of equity raises fail - as the UK reguklator, the Financial Conduct Authority, has noted.

This is the most exciting business I have ever been involved with

With debt crowdfunding, you could in theory lose all your money, although this is unlikely as the loans are usually amortising. This means that if money is lent for 5 years, the company will make 60 equal monthly repayments. However, those lending to companies should factor in that they are likely to lose 1 per cent per annum through bad debts and it is vital, therefore, that they create a diversified portfolio of loans and are not tempted to put all of their money into one high-yielding loan.

Equity crowdfunding gets a huge amount of press, but it is dwarfed by debt crowdfunding. At the end of last year, NESTA and the University of Cambridge produced a report, which estimated that £84m of equity finance was provided to UK SMEs by crowdfunding sites in 2014 and that nearly £749m of debt finance was provided.

This reflects the lower risk nature of lending to SMEs as opposed to providing equity finance for early stage companies. It also reflects the interest that is developing in this area from debt funds and institutions. This is good news for UK SMEs, who continue to find it hard to borrow from banks. This is because the banks are forced to provide a 100 per cent capital weighting for an unsecured loan to an SME, which makes it uneconomic for them to lend. They also shy away from transaction-based lending for management buyouts and acquisitions.

I have no doubt that crowdfunding is here to stay and I strongly believe that debt will be the biggest sector with lending to companies outstripping lending to individuals by a big margin over the coming years.

Money&Co. is the most exciting business I have ever been involved with. It is a much overused phrase, but I believe that debt crowdfunding truly constitutes a financial revolution.