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.