Crowdfunding - financial lending is a changing

Rewards based crowdfunding offers entrepreneurs the opportunity to have their idea validated by the crowd, obviously if there isn't much support shown the likelihood is you have a dud idea and you can move on to your next one, sparing any blushes.
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This week has seen Britain's financial technology sector welcome its first business valued at $1bn. Funding Circle, a crowdfunding platform that allows savers to lend money directly to small and medium sized businesses last week announced it had facilitated a $150m worth of fundraising, having only launched less than five years ago.

Such a feat is hardly surprising given the phenomenal growth the crowdfunding industry has experienced to date, more than doubling in size year on year, from £267m in 2012, to £666m in 2013 and hitting over £1.74bn of funding in 2014.

Sir Richard Branson, is also clearly a fan, having recently wrote about how crowdfunding is transforming the way entrepreneurs do business, along with taking an invested interest in how the industry evolves, through his investment in Indiegogo and Virgin StartUp's recently announced partnership with Crowdfunder.

The most interesting areas for the investors within crowdfunding fall into three different categories:

•PEER-TO-PEER - debt-based transactions with many individual lenders contributing to any one loan (minimising the risk for the investor, whilst giving them greater interest rates than they would receive should their money be sat in a bank, whilst unlocking much needed funding for the UK's SMEs)

•EQUITY-BASED - sale of stake in a business to a number of investors in return for investment predominantly used by early-stage firms - think Dragons Den, without the den and the suits, all you need is an internet connection and some spare cash

•REWARD-BASED - individuals donate towards a specific project with the expectation of receiving a tangible (but non-financial) reward or product at a later date (my personal favourite)

What crowdfunding has done is change the landscape for so many entrepreneurs seeking finance to launch their dream business. The reluctance of banks to support SMEs in particular has been widely documented, and was again highlighted by the Bank of England Trends in Lending report. I understand banks are now looking to be more cautious, but it does surprise me that they appear to be moving at such a slow pace to become involved with any of the platforms, especially my favourite model - rewards based crowdfunding.

Rewards based crowdfunding offers entrepreneurs the opportunity to have their idea validated by the crowd, obviously if there isn't much support shown the likelihood is you have a dud idea and you can move on to your next one, sparing any blushes.

However, should the crowd back your idea, you instantly have a customer base, which for numerous projects has enabled them to unlock further funding from banks, EU funds and investment angels, simply by being able to demonstrate there is a demand for their offering.

Whilst this works well for start-ups and SMEs, what's in for the backer I hear you say?

The rewards model (if managed correctly) sees only projects that hit their funding target receive all pledged pennies, saving investors from losing money on projects that simply lacked any potential from the offset. Ideally the investor will see their supported project prosper, meaning they played an integral part in that journey, and will also be rewarded for their support. Essentially, it's win-win.

Funding Circle certainly isn't an anomaly, there will be many other crowdfunding platforms that hit and even surpass $1bn valuation in the UK. It simply seems a matter of time before another platform joins them on the podium, especially given that 42% of 2,000 individuals surveyed by NESTA were completely unaware of any alternative finance options.

Maybe the news of Funding Circle and the growing interest from leading business figures will wake up some of the UK's biggest banks, otherwise they may well lose a significant part of their business in the near future. I certainly feel the finance and lending landscape has changed forever and in large parts for the good.