Find out more about crowdfunding and how you can borrow from, or invest your money in, the UK's burgeoning sharing economy.

Key points

  • Alternative online funding platforms
  • Projects can be almost anything - from apps to books to start-ups
  • Money may be taken before or after funds raised
  • Potential lenders should be aware of risks involved

Crowdfunding is a way for people to seek funding for a project or idea from the public, either as an alternative to a loan, or to supplement other sources of funding.

As a way of raising money in the digital age, the concept of crowdfunding has grown exponentially.

It's an alternative means of funding for start-ups, SMEs and projects in the creative sectors.

According to a report by innovation charity Nesta and Cambridge University, the UK's alternative finance industry attracted 9.4 million donors, backers and investors in 2013, a 22% increase on 2012.

With many struggling to obtain funding available from banks or the government, crowdfunding websites are popping up to provide an alternative.

But how does crowdfunding work, and what are the risks involved?Cutting the cost of loans

How does crowdfunding work?

There are several crowdfunding models, each of which asks for different types of investment from its funders.

Those seeking funding must publish details of their project on their chosen platform, along with what rewards and reimbursement they're offering to potential financers.

Some websites may reject a submission if they don't think the details of a project are worthwhile, or if they think the rewards being offered are insufficient.

Donation-based crowdfunding

This involves backers giving money to people or organisations that they want to support. The supporter won't receive a reward or product in return for their donation.

FCA regulation

  • Donation-based and rewards-based crowdfunding is NOT regulated by the Financial Conduct Authority
  • Loan-based and investor-based crowdfunding IS regulated by the Financial Conduct Authority

Anyone can get involved with donation-based crowdfunding - amounts vary but can go as low as £5.

Pre-payment or rewards-based crowdfunding

The most popular form of crowdfunding works by supporters giving money in return for a product or service.

Websites like Kickstarter and Indiegogo are populated by crowdfunding of this kind, and supporters can help fund films, albums or games they'd like to see made.

Many projects offer different levels of rewards based on the amount of money invested.

For example, funding an album for £10 may get you a copy of the album itself once it's made, but investing £50 may get your name in the liner notes, or a personal thank you from the band.

Filmmakers might offer cameos or put funders' names in the credits, depending on the amount of the investment.

Depending on the platform, when you invest in a project the money may be taken from you straight away, or only once the project has reached its fundraising goal.

If the money is taken straight away and the project doesn't get funded, your money will be reimbursed.

This is the most commonly used form of crowdfunding and anyone can get involved, whether they're investing a small amount or a bigger sum.

Rewards-based crowdfunding could be a great way to have a role in funding and supporting your chosen interest, whether that be the arts, technology or game design.

Neither donation-based crowdfunding nor rewards-based crowdfunding are regulated by the Financial Conduct Authority (FCA), but the FCA does regulate loan-based crowdfunding and investment-based crowdfunding.

Loan-based crowdfunding

Also known as peer-to-peer lending, with this type of crowdfunding customers can lend money and/or take out a loan from websites like Zopa and RateSetter.

In return investors get interest payments and a repayment of capital over time, while borrowers get access to capital, potentially at an attractive rate.

It's simple to try and anyone with some money to invest can have a go - although it's not without its risks.

Loan-based crowdfunding is now regulated by the FCA, which should provide greater protection for investors.

This includes making sure that P2P platforms carry a certain amount of ring-fenced capital to repay lenders and that they have a resolution in place in case the platform fails.

FCA regulation also means lenders will have access to the Financial Ombudsman for any complaints.

Don't be lulled into a false sense of security, though - loan-based crowdfunding is an investment, not savings, so you won't have the Financial Services Compensation Scheme to fall back on if something goes wrong.

Investment-based crowdfunding

Consumers can invest straight into a new start-up or an established business by buying investments such as shares.

The FCA regards investment-based crowdfunding to be a 'high-risk' investment activity, and advises customers to be aware of a number of potential pitfalls.

Did you know...?

  • In 2013 alone, alternative financing provided £332m of early stage, growth and working capital to 5,000 UK start-ups and SMEs

However, investment-based crowdfunding offers lenders the same protection as P2P crowdfunding.

Investors also have to confirm that they're investing less than 10% of their net investible assets, which excludes their home, pension funds and insurance.

The FCA advises that lenders perform due diligence before investing any money in a new business and that they make sure they're happy with the level of risk that they're taking.

The amount of money and risk involved in investment-based crowdfunding means that the majority of people getting involved are those with large amounts of money to wager on the future success of start-ups.

Websites hosting prospective start-up proposals are selective about the ideas they showcase, as are investors about where their money goes.

Match your project to the platform

  • Book: Unbound
    Both a crowdfunding website and publisher, authors pitch an idea for a book and then wait to see if it’s funded before writing it
  • App: Seedrs
    Fancy developing an app or starting up a new business? Seedrs is a crowdfunding platform for budding entrepreneurs that has funded new initiatives like Maily, a safe email service for kids, and Glentham Capital, the latest company from investment fund manager Nicola Horlick
  • Album: Pledgemusic
    Artists can head to Pledgemusic as a way to fund their next musical endeavour, while fans can fund albums and feel truly invested in the music

The benefits of crowdfunding

New funds

Alternative financing grew in popularity after the 2007-8 financial crisis. The banking meltdown made it harder to find the right investment for burgeoning businesses, and funding to the arts was also cut.

According to the Nesta report, the market provided £463m worth of early stage, growth and working capital to over 5,000 start-ups and SMEs in the UK from 2011-13, of which £332m was accumulated in 2013 alone.


Peer-to-business based loans, or investor crowdfunding, allows firms to obtain funding quickly - much quicker than going through the traditional route of accessing finance via a bank.

If musicians and filmmakers are looking for funding it can make the process much faster, removing the need to go cap-in-hand to banks.

Lower loan rates

With loan-based crowdfunding, borrowers can benefit from a lower rate on loans, made possible by the flexibility of individual investors who can select their terms based on their needs.

Higher savings rates

Depending on the platform and product you choose, P2P has the potential to offer attractive interest rates to savers.

Building relationships

Seeking funding and help from online communities via social media allows entrepreneurs and artists to build and monetise their relationships and networks.

Breaking down barriers

Barriers to people becoming entrepreneurs arising from accessing capital can be broken down by crowdfunding - whether gender, race or other non-business factors. According to the Nesta report, funding mechanisms are often more democratic and less biased.

The drawbacks of crowdfundingA piggy bank wearing a pair of sunglasses


If you haven't protected your idea with a patent or copyright, making it public in the pursuit of funding means it could be copied.

You need to reach the target

Crowdfunding websites will ask you to set a target in advance of your project going live - say £20,000 in 30 days - and you'll need to meet that target to be successful.

If not, the money will be returned to the investors and you'll have to start again.

Digital divide

According to the Nesta report, there's a digital divide in crowdfunding.

As with other social-based mechanisms, this is based on computer literacy, access to the internet and mobile technology, plus comfort with web-based transactions.

By Emily Bater