Crowdfunding and peer-to-peer lending: How start-ups learnt to work a crowd

While the debate continues to rage over whether banks are actually lending to companies, small businesses have discovered another source of funding

The Government claims to have held ordered Britain’s big banks to lend more to small businesses and start-ups. The banks say they are doing just that, and the companies that are supposed to be in receipt of that gold rush reckon lenders are still slamming the door in their faces.

And somewhere in the middle of all those claims, crowdfunding and peer-to-peer lending – also known as P2P – has grown to a behemoth set to raise £1.9bn this year, double the £0.9bn raised in 2011, according to a report by the consultants Deloitte.

They work in a similar way to BBC business show Dragons’ Den, where entrepreneurs and small-business owners pitch ideas and are offered investment based on the strength of their offer. But crowdfunding and P2P take the power to bless or condemn an idea away from Deborah Meaden and her fellow Dragons, as well as from the banks, and put it in the hands of anyone with cash to spare, who vote with their wallets if they believe in a project.

Crowdfunded schemes now stretch from new technological devices and media content such as computer games, apps and music to the “cat cafe”, which is set to open in London this year after an Australian entrepreneur raised £100,000 through crowd-funding website Inidegogo.

And while some crowdfunding sites exist to raise money for entrepreneurs and profit for investors, others serve a more charitable purpose: Seedrs and Fund The Gap let people invest in ideas in return for shares in the venture; Spacehive is a way of donating a little to charitable projects in local communities – such as free WiFi in a town centre or planting a communal garden – while Funding Circle and Funding Knight invite individuals to earn interest by lending to businesses.

While crowdfunding is usually aimed at start-ups and asks backers to invest to get an idea off the ground, P2P is usually directed at businesses that have been around for at least a few years. Investors on crowdfunding sites such as Kickstarter and Indiegogo are most likely to be rewarded with discounted product samples, album downloads  or simply a personal “Thank you” on Facebook. But in P2P lending, where the biggest names in the UK include Funding Circle and Zopa, investors receive a percentage financial return. Credit-assessment teams work out the risk involved in investing in small businesses that apply for funding, while return-hungry individuals put up the cash, earning up to 8 per cent. Comparison sites such as p2pmoney.co.uk now even compare returns.

In both P2P and crowdfunding arenas, however, demand is buoyant. Funding Circle has just doubled to £1 m the size of loans that businesses can apply for, and is busy lending £20 m allocated to it by the Government under the Business Finance Partnership. The site, which was set up in August 2010, has to date overseen £85m-worth of loans to small businesses across the UK. Meanwhile since Kickstarter’s launch in April 2009, more than $538m (£344m) has been pledged by some 3.7 million people, funding 38,000 creative projects, including six films that have since been nominated for Oscars.

Case Study: Community spirit gets a helping hand

In a small town north of Pontypridd in Wales, a new community centre is going up after more than £40,000 was raised through Spacehive – a crowdfunding site for community projects.

Glyncoch Community Regeneration, the group of local residents behind the project, had secured 94 per cent of the money it needed through grants from the Welsh government and local council, but was still short of the £790,000 goal.

“We were in a position where we needed the resources, and we had explored all avenues to raise the last amount,” said Louisa Addiscott, a community worker involved with the centre. Through Spacehive,  107 contributors pledged a total of £42,021 to help build the Glyncoch Community Centre.

“Spacehive was a new way of funding and allowed us to get out to a lot of new parties,” Ms Addiscott told The Independent.

She said that a variety of different organisations – including the Tesco Charity Trust – had donated through the website as well as “people from the community we are actively involved in, and a lot of small businesses from the local area”.

Ms Addiscott stressed that fund raising was not just a matter of listing the project on a website, and waiting for the money to roll in.

“One of the key things you’ve got to realise is that it is a joint effort,” she said. “You have to be ready to do a lot of work, and make sure you have lots of people behind you.

“Raising money locally is important, and you’ve got to prove you’ve done a lot of work yourself. Don’t go in there thinking it will be an easy ride.”

Case Study: Product gets full backing after a pregnant pause

Vanessa Blake was pregnant with her first child when she found herself struggling to sleep at night, and decided to design a special pregnancy pillow with the aid of advice from midwives and fellow mothers.

Together with her husband, Stephen, she made samples and began marketing the product at a pregnancy trade show, where they sold out. But the entrepreneurs needed access to finance in order to expand the business – and encountered reluctance from the banks. 

The couple, from Witney in Oxfordshire, found that despite the success of their Dreamgenii pregnancy pillow, they were unable to get a loan because banks “weren’t willing to provide what they saw as venture capital,” according to Mr Blake. “If we were a small country trying to raise £500bn we would probably have had a better chance,” he added.

In late 2012 the Blakes decided to use Funding Circle to help boost their burgeoning business.

“Funding Circle looked at the patent, the package, the product and took us on board,” Mr Blake said.

Within two weeks, they had secured the full amount, with almost 1,400 people across the UK lending amounts from as little as £20.

“We were staggered by how quick it was,” said Mr Blake. “We knew we were a good proposition, and Funding Circle underscored that.”

Dreamgenii products are now sold in retailers including Mothercare and John Lewis, and by the National Childcare Trust.

News
Jeremy Paxman has admitted he is a 'one-nation Tory' and complained that Newsnight is made by idealistic '13-year-olds' who foolishly think they can 'change the world'.
peopleThe idea has been greeted enthusiastically by the party's MPs
News
Michael Buerk in the I'm A Celebrity jungle 2014
people
Voices
File: David Cameron offers a toast during a State Dinner in his honour March 14, 2012
voicesAnd nobody from Ukip said babies born to migrants should be classed as migrants, says Nigel Farage
Arts and Entertainment
Avatar grossed $2.8bn at the box office after its release in 2009
filmJames Cameron is excited
PROMOTED VIDEO
Arts and Entertainment
Stik on the crane as he completed the mural
art
News
Happy in his hat: Pharrell Williams
people
Arts and Entertainment
Stella Gibson is getting closer to catching her killer
tvReview: It's gripping edge-of-the-seat drama, so a curveball can be forgiven at such a late stage
News
Brazilian football legend Pele pictured in 2011
peopleFans had feared the worst when it was announced the Brazil legand was in a 'special care' unit
News
i100(More than you think)
Sport
Brendan Rodgers seems more stressed than ever before as Liverpool manager
FOOTBALLI like Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
News
ebooksNow available in paperback
News
The Magna Carta
archaeologyContemporary account of historic signing discovered
News
Phyllis Dorothy James on stage during a reading of her book 'Death Comes to Pemberley' last year
peopleJohn Walsh pays tribute to PD James, who died today
Sport
Benjamin Stambouli celebrates his goal for Tottenham last night
FOOTBALL
Life and Style
Dishing it out: the head chef in ‘Ratatouille’
food + drinkShould UK restaurants follow suit?
News
peopleExclusive: Maryum and Hana Ali share their stories of the family man behind the boxing gloves
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Argyll Scott International: Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Argyll Scott International: 2x Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Recruitment Genius: Senior Execution Trader

£30000 - £250000 per annum: Recruitment Genius: A global Rolling Spot FX, Comm...

Citifocus Ltd: ACA - Financial Reporting

£Attractive Package: Citifocus Ltd: Chartered accountant (ACA or CPA), must be...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game