Guide

Crowdfunding

Advantages and disadvantages of crowdfunding

If you are considering raising finance for your business, project or venture through crowdfunding, there are a number of factors that you might want to consider.

Advantages

Eight advantages of crowdfunding:

  • it can be a fast way to raise finance with no upfront fees
  • pitching a project or business through the online platform can be a valuable form of marketing and result in media attention
  • sharing your idea, you can often get feedback and expert guidance on how to improve it
  • it is a good way to test the public’s reaction to your product/idea - if people are keen to invest it is a good sign that the your idea could work well in the market
  • investors can track your progress - this may help you to promote your brand through their networks
  • ideas that may not appeal to conventional investors can often get financed more easily
  • your investors can often become your most loyal customers through the financing process
  • it’s an alternative finance option if you have struggled to get bank loans or traditional funding

Disadvantages

Six disadvantages of crowdfunding:

  • it will not necessarily be an easier process to go through compared to the more traditional ways of raising finance – not all projects that apply to crowdfunding platforms get onto them
  • when you are on your chosen platform, you need to do a lot of work in building up interest before the project launches – significant resources (money and/or time) may be required
  • if you don’t reach your funding target, any finance that has been pledged will usually be returned to your investors and you will receive nothing
  • failed projects risk damage to the reputation of your business and people who have pledged money to you
  • if you haven’t protected your business idea with a patent or copyright, someone may see it on a crowdfunding site and steal your concept
  • getting the rewards or returns wrong can mean giving away too much of the business to investors

For a comprehensive overview of crowdfunding as an alternative form of raising finance for your business, see Nesta's (National Endowment for Science and Technology and the Arts) guidance on understanding alternative finance.

Before deciding on a crowdfunding platform for investment, you might consider whether other forms of finance could better meet your needs - see alternatives to equity finance.