Over the past few decades, small business crowdfunding in the UK has democratised the way both new and more established merchants can source finance for their business.
In 2023, the total value of crowdfunding transactions for small businesses in the UK was approximately £47 million, and the average funding per campaign was around £16,000.
While traditional business loans were once the main way for any business to source the capital needed to fund their business plan, crowdfunding platforms have since enabled businesses to acquire funding for their business ideas or projects from the general public.
In this guide, we’ll explore what crowdfunding is, the different types of crowdfunding available, and how you can use crowdfunding to achieve the next stage in your plans for small business growth.
What is small business crowdfunding?
Crowdfunding for small business start-ups is a form of fundraising where multiple private individuals fund a business or a specific project.
This is usually carried out through an online platform which will take a certain percentage of the funds raised, a set fee, or both, in return for helping you run a crowdfunding campaign and promoting your project on the platform.
In a crowdfunding format, small businesses solicit funding from a large group of people, (the crowd) rather than a single institution like a bank or a small group of investors, as with small business loans.
There are various types of crowdfunding distinguished by the reward (if any) that participants receive in exchange for their investment.
In some crowdfunding campaigns, contributors’ investment is effectively charitable, and the recipient business will have no obligation to the people who contributed to the campaign.
In other cases, businesses may need to pay back crowdfunding contributors (often referred to as backers) with some kind of reward, such as equity in the business, or free or discounted products or services.
This distinguishes crowdfunding from small business grants, which usually don’t come with an obligation to pay back the value of the money awarded.
As crowdfunding is often used for creative projects, as well as business ventures, it can be an accessible source of finance for side hustles and new business ideas that have yet to be developed into making a profit.
4 types of crowdfunding
The majority of crowdfunding campaigns can be organised into 4 main types:
Equity crowdfunding
Rewards crowdfunding
Donation crowdfunding
Debt crowdfunding
If you aspire to be your own boss and already have a good business idea, we’ll take a brief look at each type of crowdfunding available, and the features that could make them more or less well-suited to your needs.
Equity crowdfunding
In an equity crowdfunding model, backers who invest in your business will receive shares in the business in return for their investment.
Equity crowdfunding campaigns tend to attract smaller numbers of large investors, because it usually has more appeal to backers who are hoping to make a return on their investment.
Investors could also take advantage of the SEIS (Seed Enterprise Investment Scheme) or EIS (Enterprise Investment Scheme) if your business meets the conditions, applies and qualifies. These are government venture capital schemes designed to help new businesses find investment more easily by providing investors with tax relief on their investments.
Equity crowdfunding may be popular among new businesses with a high potential for growth. Examples might include home-based businesses developing an in-demand tech product, or an independent cafe that’s had a strong proof of concept with one branch, and wants to expand their brand into a chain.
Though equity crowdfunding tends to give you access to higher amounts of capital, and longer investor relationships, it does mean you’ll lose some ownership and control of your business. You’ll also need to take legal advice and prepare the business for being able to allocate shares to external investors..
Rewards crowdfunding
In the rewards crowdfunding model, backers contribute their money in exchange for some kind of reward. This might come in the form of free products, or exclusive discounts on the standard price of a product or price of a service.
Limited companies and individuals often manage rewards crowdfunding campaigns in a tiered model, where higher contributions to the campaign receive more valuable rewards.
This can help to encourage backers to invest more into your business or project, while still keeping the investment options accessible to a large audience of varying income levels.
Many rewards crowdfunding platforms have dedicated features for distributing digital products. Because of this, rewards crowdfunding may be popular among creative sole traders like graphic designers, who will be able to offer assets or templates as rewards to backers.
One of the key unique selling points (USPs) of rewards crowdfunding is that it helps you retain full control of your small business as it doesn’t require you to give up any equity.
However, it does require more work to forecast the kinds of rewards you’ll need to fulfil, choose rewards that are likely to attract backers, and finally distribute the rewards to your contributors.
Donation crowdfunding (social crowdfunding)
In donation crowdfunding, sometimes called social crowdfunding, backers won’t receive any kind of return in terms of equity or a product or service-based reward.
Donation crowdfunding is usually associated with non-profits or social enterprises. Backers will typically want to know that their contribution is going towards some kind of social cause or community project.
However, this doesn’t mean there’s no overlap for start-ups that are set up to be profitable, but are purpose-led or wish to give back to their communities.
If you’re a personal trainer, for example, and want to contribute your skills to a project that helps local disadvantaged people keep fit at discounted rates, this could be a suitable project for a donation-based crowdfunding campaign.
Debt crowdfunding (P2P lending)
Debt crowdfunding, also known as peer-to-peer (P2P) lending, works in a similar way to traditional loans. However, rather than applying for a loan from the bank, you’ll acquire the capital from several private backers.
Like with a conventional business loan, once you receive the funds from a debt crowdfunding campaign, you’ll have to pay the loan back with interest before a given date.
Like with rewards crowdfunding, debt crowdfunding allows you to retain full ownership of your business, and your only obligation to the investors will be paying off the loan.
The main drawback of debt crowdfunding is that you’ll need to pay back the amount raised with interest.
Depending on the small business crowdfunding sites available to you, and the exact terms of the P2P lending agreement, this could mean that you’ll be able to find better terms through more conventional loans.
As with all types of business lending, having outstanding debt can make it harder to attract investors, and negatively affect your financial analysis statements and the valuation of your business.
The benefits of small business crowdfunding for UK merchants
When you’re looking to finance a new business, crowdfunding for small business start-ups can have a variety of benefits that may make them an attractive option for your business.
Here are some of the key reasons to consider crowdfunding as a small merchant in the UK.
Funds without the banks
Crowdfunding to start a small business or finance a particular project, for example expanding a food truck business’s fleet, means you can avoid some of the drawbacks that come with getting a conventional business loan or seeking out private investors.
While government start-up loans have a fixed interest rate, private business loans can potentially have much more expensive repayment terms. Crowdfunding can make it harder to attain the amount of capital you need compared to a standard business loan.
However, you won’t be required to pass the same credit checks, and may be able to find repayment terms that are more affordable than those from private loans or investors.
It can help you test concepts
Many small business crowdfunding sites have a social element to them where contributors can give their feedback on the business ideas that are seeking funding. This can make them an effective tool for testing new concepts and gathering feedback.
Imagine, for example, that you’re running a food truck and seeking funding for a new line of vegan menu items.
Outlining your plans in detail on a crowdfunding platform may give the public an opportunity to point out potential issues with sourcing certain ingredients.
It may also help you gauge market saturation by drawing comparisons between your new product and active competitors.
This type of market research can help to inform a SWOT analysis of new products or service offerings and provide honest feedback needed to fine-tune your small business to your target market’s preferences before a launch.
Crowdfunding can double as marketing
Aside from allowing you to source honest feedback from people in your target audience, crowdfunding campaigns can also be an effective channel for marketing and raising awareness of your business.
If enough people in your target market find your small business crowdfunding drive compelling, they may share it on social media. This will help amplify your campaign without you having to spend much time or resources spreading your campaign’s message.
Unlike paid advertising or email marketing, marketing your crowdfunding campaign will require you to start with a strong, unique pitch on the campaign’s page.
Take concepts from search engine optimisation (SEO) and content marketing such as optimising for keywords in the text, and writing high-quality engaging content that’s carefully tailored to your audience.
Taking the time to develop this part of your crowdfunding pitch will maximise your chances of your campaign resonating with your target audience and being shared organically across social platforms.
It helps you build a loyal customer base
The social aspect of crowdfunding encourages entrepreneurs to keep contributors updated on the progress towards their crowdfunding goals.
Due to this, crowdfunding backers will have a unique relationship with your business from the start, creating a natural way to develop closer relationships and customer loyalty.
As your business develops and you invest more time into customer acquisition initiatives on social media and other channels, the visibility of a loyal customer base will help to attract other people in your target audience.
This sense of community will help support your customer retention efforts.
Small business crowdfunding tips and best practices
Though crowdfunding for small business start-ups has many potential benefits, it’s also a competitive niche.
One that requires a careful, strategic approach using the application of established best practices to achieve success.
Here are some crucial best practices to bear in mind when you’re looking to source small business crowdfunding.
Define your funding needs and objectives
The first step in your approach to crowdfunding should be to define your crowdfunding needs and objectives.
To do this, it’s recommended that you start by articulating the problem you’re trying to solve with the capital you’re planning to raise via crowdfunding.
If you’re planning to develop a new product, for example, you’ll need to consider various factors that may affect the cost of this project.
This might include the size of the team who will be involved, when you’re planning to launch, and the marketing strategy that you’ll use before and after this launch date.
By budgeting for this process in detail and comparing the costs to your recent cash flow data, you’ll be able to set an exact funding target aligned with your business needs, and use this to inform the planning and execution of your campaign.
Remain legally compliant
Like other kinds of fundraising, small business crowdfunding comes with legal requirements that you’ll need to understand and adhere to.
Some of the things you’ll need to research in order to ensure legal compliance include:
Whether the funds raised will qualify as taxable income, and the implications this will have for your small business tax management.
Crowdfunding regulations maintained by the Financial Conduct Authority (FCA) and the steps you’ll need to take to ensure you’re adhering to these.
Privacy protections for crowdfunding backers are assured by legislation like the General Data Protection Regulation (GDPR) and the UK Data Protection Act, including the steps you’ll need to take to adhere to these.
You’ll be able to ensure compliance with these to some degree simply by carrying out your own research or using the assistance offered by crowdfunding platforms.
The topic of legal compliance when crowdfunding can be complex. To ensure you’re minimising your and your backers’ financial risk, it’s recommended that you consult with a corporate lawyer who specialises in crowdfunding and data protection.
Choose the right platform
There’s a variety of small business crowdfunding sites you can use to run your campaign, and you’ll need to find one that’s suited to the unique needs of the business or project you’re planning to finance.
Key things to consider when choosing a crowdfunding platform include:
The platform’s industry focus and how this aligns with your business.
The kinds of online payments the platform accepts and how this matches with your target audience’s preferred payment methods.
The level of customer support you’ll receive.
The fees you’ll have to pay in order to run a crowdfunding campaign, and how this fits into your small business budget.
The customisation and promotion options available for campaigns, and how well this will allow you to promote your campaign sufficiently.
Create a compelling pitch
Along with the rewards you’re offering backers, your pitch is going to have a major influence on your ability to capture people’s interest and convince them to invest.
When you’re crafting your pitch, you should aim to follow general content marketing best practices, such as:
Carrying out market research to study your audience.
Clearly articulating a USP that will solve a specific issue
Keep your pitch as concise as possible.
Aside from this, crowdfunding pitches can also benefit from using storytelling techniques that will humanise your brand and help get your audience invested in your personal entrepreneurial journey.
If you’re an independent craft maker, for example, your pitch shouldn’t be solely focused on the features of your product. Give potential backers some idea of how you first discovered your love of crafts, for example if it began as a hobby or a personal passion for handmade goods.
You should also talk about the challenges you’ve overcome while growing your business, and your goals for the future which your crowdfunding will support.
Offer rewards and incentives
The rewards and incentives people can earn by contributing to your crowdfunding drive will be another key predictor of how successful your campaign is.
To maximise the chances that your rewards drive engagement and contributions to your small business crowdfunding campaign, you should ensure that they:
Are tailored to your target market’s preferences.
Have a reasonable value aligned with each reward’s contribution tier, and the kind of incentives that businesses similar to yours have offered for their campaigns.
Are realistic and achievable for you to deliver with your resources.
Crowdfunding rewards you might want to consider offering to incentivise contributions include:
Free or discounted exclusive products.
Entries into competitions.
Personalised items.
Exclusive product bundles.
Experiences, such as attendance at a workshop or exclusive behind-the-scenes visits to your business or networking events.
Promote your crowdfunding campaign
Once you’ve crafted your pitch and finalised the tier structure and incentives of your crowdfunding campaign, the next stage is to promote it.
The most effective methods to market a small business crowdfunding campaign include:
Social media
Social media offers a wide reach and opportunities for direct interaction with your audience to keep them updated on your crowdfunding campaign’s progress.
Email marketing
Email marketing allows for a high level of personalisation using the data from your subscribers’ list. Segment your email list based on location, personal interests and engagement levels to ensure your marketing material is relevant to each group.
Use email marketing to share specific milestone updates in your campaign to build a stronger connection and engagement with your target audience.
Word-of-mouth marketing
Word-of-mouth marketing can be one of the most cost-effective methods of promoting your campaign, especially for small UK businesses.
For small business owners start with your immediate circle including friends, family members and existing loyal customers. Make the most of local networks and communities to help position your business or project and build momentum for your crowdfunding campaign.
Word-of-mouth marketing is typically seen as more trustworthy and genuine compared to other forms of promotion (such as paid advertising).
Sharing testimonials from early backers
Testimonials and customer reviews give your campaign greater credibility and inspire trust through social proof.
These are both particularly important if you’re starting a new business, or trying to develop a side hustle that you haven’t promoted heavily in the past.
Press coverage
PR can improve your reach and local credibility, and also help you earn backlinks to your online business touchpoints, which is an important part of SEO marketing.
Seeking endorsements
Endorsements can give you exposure to the networks of influential people for enhanced reach, and further improve your brand’s trustworthiness.
Potential challenges of crowdfunding
Though small business crowdfunding has a lot of potential as a method of raising funds, it also comes with a unique set of potential challenges.
When you’re planning your campaign, it’s crucial that you carry out independent research on these challenges, and create small business risk management plans that will help to guard against the impact of these obstacles.
Potential challenges to plan for can include:
Building enough awareness and engagement of your campaign to reach your funding goal.
Setting realistic goals and managing expectations.
Maintaining an initial burst of engagement with regular updates about the project your campaign is funding.
While there have been start-up crowdfunding campaigns that have seen huge success in the past, it’s important to remember that crowdfunding can be highly competitive, and some campaigns will fail to meet their fundraising goals.
To make sure you’re still able to start your business or execute your expansion project, it’s important to have another source of financing as a backup and to avoid relying solely on crowdfunding to achieve your aims.
Seek financial advice
Like with any other method of financing your business, it’s also important to seek professional financial advice to maximise your crowdfunding campaign’s chances of success.
A professional financial advisor will not only be able to support you with strategic guidance on your campaign structure, setting realistic goals, and risk management, but also provide key advice for regulatory compliance.
If needed, your financial advisor will also be able to support you with investing the funds raised through your crowdfunding campaign as efficiently as possible with professional financial analysis and cash flow management, better aligning your resources with the long-term goals of your business.
What should you do after your crowdfunding?
Once your crowdfunding campaign is complete and you’ve secured the funds from your backers, there’s a number of additional steps you should plan for.
The following activities will help you keep your backers engaged, further expand your marketing reach, and ensure your future success.
Here are some examples of the steps to take after a successful crowdfunding campaign for an independent restaurant:
Fulfil rewards
The first thing to do is begin actioning the rewards you promised your backers according to the contribution they made to your campaign.
Rewards might include reservations on your grand opening night, exclusive discounts, or private chef’s table dining experiences.
Invest in growth
Use the funds you’ve generated to achieve the goals of your crowdfunding campaign and broader small business growth strategy.
If one of your goals was upgrading kitchen equipment, for example, you could invest in energy-efficient appliances to reduce long-term costs and improve operations.
Update your audience
Your backers, and anyone else who’s been following the progress of your campaign, will want to know how your project is going and how their contributions are making a difference.
Share information and visual updates on how the funding is being used, before-and-after photos of the renovation funded by the crowdfund, new menu items created from your kitchen equipment upgrades.
Expand your reach
A successful crowdfunding campaign is cause to celebrate your success. Partner with food influencers, local bloggers and media to broadcast the news about the latest developments at your restaurant, and stimulate engagement.
In particular, inviting recognised popular figures in the food industry to experience a meal or write about your crowdfunding journey can help to improve your brand credibility in the wider industry.
Analyse, learn, and iterate
Review your crowdfunding’s biggest successes and failures, articulate the lessons learned, and prepare useful materials for your future fundraising efforts.
8 small business crowdfunding sites and platforms
Crowdfunding is a large and diverse industry, with a wide range of start-up crowdfunding sites and platforms suited to different kinds of businesses and goals.
To help you find the platform that’s right for you, here’s a comparison of 8 popular small business crowdfunding sites and platforms to consider.
Platform | Type of Business | Platform Fees | Audience Reach | Campaign Duration | Success Rates and Other Considerations |
Kickstarter | All types, with a particular emphasis on art, design and other creative niches. | 5% of total funds raised + 3% + £0.20 per pledge. | Global audience with more than 15 million users. | Fixed, all-or-nothing (no payout if you don’t reach your crowdfunding goal.) | Exposure to a large, engaged audience but only funds if the target is met. Some users have reported a lack of personalised technical support. |
Crowdfunder | Start-ups in all sectors, as well as non-profits and social enterprises. | 5% of total funds raised + 2.4% + £0.20 per pledge | UK | Flexible (keep what you raise and all-or-nothing formats available.) | Smaller audience, additional support with fundraising coaches, potential for extra funding from the platform’s match funding +Extra fund. |
IFundWomen | Women-led start-ups from all sectors. | 5% of total funds raised + 2.9% + £0.25 per pledge. | Global audience with a women-focused community both for customers and backers. | Flexible (Keep what you raise.) | Smaller platform, but offers coaching and access to small business grants for female founders. |
Seedrs | New or growth-stage start-ups. | 6% of total funds raised + 0.5% payment processing fee + £2,000 completion fee. | UK | Variable (equity-based.) | Large UK audience, but relatively high competition and platform fees. |
CrowdBnk | Pre-revenue start-ups. | 5% of total funds raised + 3% payment processing fee. | The UK. A more commercial audience means there’s less opportunity for creative projects. | Variable (equity-based.) | Personalised support is available, but smaller user base and rigorous vetting process. |
Crowd2Fund | New start-ups and non-profits. | 6% of total funds raised + 6-18% APR for loans. | UK-focused. | Variable (equity, debt, and donation formats available.) | Flexible monthly repayments. |
Funding Circle | Start-ups and SMEs in all sectors. | Interest rates starting at 7.9% per year. | Global audience with P2P lending focus. | Loan-based. | Fast access to loans without the need to run a campaign, but you take on debt, which can affect future investor interest. |
Crowd for Angels | Businesses at any stage of their development. | Equity: £250 + 7% platform fee + £2,000 legal fee; Bond: £250 + 3% + £2,000 legal fee; Digital assets: £250 + 7% + £1,500 legal + £5,000 digital asset prep fee. | UK-focused. | Variable (equity, bond, and digital asset formats available.) | Offers equity, bond, and crypto payment options with strong support, but requires you to pay legal fees, which isn’t a concern on many other platforms. |
Disclaimer: The contents of this page are intended for informational purposes only and should not be construed as professional advice. For matters requiring legal or financial expertise, it’s recommended to seek guidance from qualified professionals.
FAQs
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