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Crowd pleasers - new financing models

Crowdfunding, payday loans and other finance models have become popular since bank funding dried up. Christian Doherty finds out how they are shaping the market.

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Crowd pleasers
One of the biggest dilemmas in the effort to increase the levels of liquidity into the growing business market is making lending to smaller businesses profitable. If the banks are reluctant, then why should a private investor or commercial finance house make funds available instead? What’s in it for them?

The answer it seems is in appealing to a much broader investor range, and going below the line to almost micro-finance levels. Given the rock bottom returns on offer on savings, it’s not hard to understand why those looking for a real-terms return on their cash might look at business lending and investing as a viable option. To serve that need, a number of businesses have sprung up.

As well as replacing finance from banks, alternative finance providers are also aiming to replace PE and VC providers. Crowdcube, launched in 2011, is one of them. This company plays a similar role to that of a business angel network.

It’s one of several equity crowdfunding platforms that have sprung up in the past few years. The model is simple: “We effectively allow people to invest and own shares in companies,” explains cofounder Luke Lang.

“Technically we’re targeting start-up and early stage businesses, but we’ve also funded businesses that have been trading for 20 years and more. So it’s not just seed capital, though that tends to be where there’s a real thirst for finance.”

Dragons in many dens

Essentially Crowdcube, and other companies like it, are positioning themselves in the space traditionally occupied by business angel networks – connecting investors with those hungry for equity investment.

“The model is, rather than a company going to one or two wealthy individuals or the bank, they can effectively create a pitch and present their business to a nation of armchair ‘dragons’ who are looking to invest through Crowdcube, and they get shares in return,” says Lang.

This is an extract from the Finance & Management Magazine, Issue 209, April 2013.