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Info on CrowdFunding and Business - - CFP

posted Apr 3, 2013, 3:41 PM by Andrew Manzo   [ updated Apr 5, 2013, 4:30 PM by David Khorram ]

Crowdfunding is the term used when a group of like minded individuals get together to fund or invest in a project. According to Forbes Magazine crowdfunding is set to top US$3 billion in 2012. Increasingly, crowdfunding is replacing bank finance for those seeking to raise investment for many different kinds of projects and business ideas.

Crowdfunding is:

  • Investment WITHOUT Banks
  • Has No Borrowing Costs
  • Accessible to most people
  • Investing in projects you believe in

Although crowdfunding started out as a way of artists completing small projects like staging theatre shows, or recording an album, the global economic crisis has meant that small business owners and startups have begun to look to crowdfunding to replace the bank lending woefully missing from today’s economy.

CrowdFunding Businesses & Start Ups

There are now many websites dedicated to crowdfunding investments in new businesses or start-ups. However, investing in fledgling businesses carries serious risks, especially if you are not an expert in the relevant field.

Many of the questions investors routinely need answers to, like ‘who came up with your valuation?’ and most importantly, ‘what’s my exit?’ are notoriously hard to get answers for.

What is Crowdfunding Property?

Crowdfunding  property takes the innovation of crowd funding – investing without bank involvement – but applies it to safer mainstream property investment.

Basiscally, a group of like minded investors come together to purchase property assets – either to control, rent or sell at a profit.

Crowdfunding property differs because the investors usually have ownership of the property as well as full day to day control of their investment.

This simply doesn’t happen with business crowdfunding. No small business owner is likely to give their investors day to day control along with full security in return for their investment.

Because of the unique way in which property investment works in the UK, when crowdfunding investment property, investors have far more transparency and tools for due diligence at their disposal.

Due Diligence

Like any investment, before you commit you should always perform as much due diligence as possible on your intended investment. How easy this is in practice depends entirely on your class of investment.

In businesses and start up companies, it’s extremely hard to find information that you need as investors.

With property, this due diligence becomes far easier, simply because buy to let residential property is such a mainstream investment and there are many tools available to help you decide whether an investment is right for you.

Property Investment is More Transparent

Property values are set independently, sale prices can be verified, contracts can be lodged with the Land Registry, title and searches checked by lawyers, properties can be insured against risks and so on.

With property there is an inherent value in a property that doesn’t exist in shares in a widget maker or a ‘blue sky’ startup company.

When crowdfunding property, investors are usually looking towards safer, more realistic returns on investment.

No Bank Interest Rates – No Bank Leveraging

Crowdfunding property allows like-minded investors to expand their property portfolios without the need for bank finance. Because there is no need for bank involvement the profitability of ventures is not determined by interest rates out of the control of the investor. This certainly isn’t the case for buy to let mortgages.

Crowd funders can invest smaller sums – typically from as little as £5000.

Spread the Risk by Leveraging Other Investors’ Money

If, like most investors, you are a solo investor buying property the traditional way and leaving all your cash deposit in the asset, you are likely to run out of cash very quickly. With crowd funding, it’s possible to spread your portfolio risk by sharing the cost with a group or ‘crowd’ of investors, operating under a common purpose.

Each investor in the crowd is in effect leveraging the investment of the others in the crowd. This allows a group to purchase properties beyond the means of many solo investors, without the need for borrowing or buy to let mortgages.

Investors undertake the same kind of due diligence as when buying with a bank mortgage – checking title, RICS valuation, market rentals etc, but share any risk with fellow investors.

In a Falling Market Investors Lose Less in Crowd

One of the key benefits to buying property with a crowd compared to a buy to let mortgage is that in the event of prices falling, a solo investor with a buy to let mortgage stands to lose far more than investors in a crowd. This is the way banks conduct mortgage lending – so that the investor takes all of the risk and the  bank, none.

Read this article on Crowdfunding vs Buy To Let here.

Benefits of Crowdfunding Property Investment

  • Minimum Investment Typically £5000
  • Returns well in excess of Bank Savings Accounts
  • No Credit History Needed
  • No Bank Finance Involved
  • Your crowd provides funding
  • Investors own the property and hold the security
  • Pre-Determined Exit Strategy
  • Managed Exit Possible

*Average Annual Return on Investments can be over 15 times GREATER than Barclays Everyday Saver Account* (although no level of return is guaranteed and property values and rental incomes can fall as well as rise). Barclays Everyday Saver Account published annual rate July 2012 on less than £10,000

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