Should start-ups be seriously considering crowd funding sources such as Kickstarter over traditional options?


In recent weeks, there has been a lot of chatter  around funding for start-ups and government pledges to get them off the ground. Some may see it as a guiding light through difficult economic times; however others may see it as total rubbish.

There was the debate about starting up now, or staying in school to learn how business works. There was also the announcement made by Business Secretary Vince Cable as he spoke of the Government’s support for Small and Medium sized Enterprises (SMEs) at the MADE entrepreneurial festival in Sheffield. He met some of the young people who have received a Start-Up Loan and are taking their first steps in business.

Rather optimistically, Vince Cable said: "With more young people than ever before looking to start their own business, Start-Up loans will provide the support they need to help get their business ideas off the ground. The scheme is not just about money. They will also get access to professional mentors who will pass on their knowledge and expertise about running successful enterprises. Money is going out of the door now, so those who want to take advantage should apply today."

The new Start-Up Loans Company, chaired by Dragons’ Den judge James Caan, says 1,200 young people have registered an interest in applying for the loans, which will be delivered to 18 to 24-year-olds by providers including The Prince’s Trust and Young Britain, alongside the offer of mentoring.

Traditionally, a small business owner would create a business plan, detailed over numerous pages with SWOT analysis, business insights and predicted cash flow. This process normally takes days and then you have to pledge with banks – or some young, upstart suit that laughs at your concept – to lend you money.

There is another way. A way that is becoming more and more popular.

Kickstarter, like other similar schemes, is a crowd funding source where it facilities monetary resources from the general public, a model which circumvents many traditional avenues of investment. Get this, the project creators choose a deadline and a goal of minimum funds to raise; thereby creating your own destiny. It is a sponsor network, and dealing minimally with those pesky venture capitalists.

The most common purpose for crowd funding loans is to pay off business credit card debt with lower interest rate loans obtained on the websites. However, it is worth noting, that loans for general business purposes are rapidly increasing. Creative arts project like films and projects to create intellectual property like smartphone apps are popular with lenders.

It is not all rosy though. Borrowers need to accept and understand the lender’s motivations to be successful getting loans online. Lenders will simply not hand you the money and run, they want to personally engage with the projects and companies they fund. Hardly surprising. But if you are willing to work with a monkey on your back, then these schemes are destined for you.

These websites match prequalified lenders and borrowers and assign credit ratings to the latter. The former make interest rather bids based on the borrower’s credit rating. All sounds rather fun doesn’t it?

The rate may seem high, but it is lower than most bank loans and credit cards for the same credit rating. Due to the commission’s credit rating standards the default rate is about 3 percent, which is not much worse than for bank loans and credit cards.

So if you are an aspiring entrepreneur, or have a really cool idea, there are more ways than just to rely on banks and government funding. However, with anything, just be careful and do your research.

Have you been involved in a Kickstarter, or similar, scheme? Tell us about it? Do you have faith in the government and banks to get back on their feet?

Let us know below, or comment on twitter @MicrosoftSB

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