Crowdfunding is risky, but it is one to watch

This is an area that is expected to become more mainstream in the next few years.

I was at a meeting on Thursday presented by Nicola Horlick, who was famously called “The City Superwoman” for combining her role as a mother with a high-flying job. Nicola now runs Money&Co, a company that specialises in crowdfunding.

She explained that there are three main types of crowdfunding. Firstly, there is when someone as a business idea that people want to support because they simply want the idea to succeed and not for their own profit. This type of funding doesn’t provide an investment return but there may be other benefits reserved for the funders related to the product or service that has been funded, such as free previews or samples.

The second type of funding involves the funder taking an equity stake in the company that they are investing in and sharing in any potential profits. This type of investment can be very lucrative and can come with significant tax breaks, if EIS or SEIS structures are used. They are, however, considered to be very high-risk.

The third, and most common type of funding, is debt finance. This is where the company that requires finance advertises how much they need and the investor lends the money at an agreed rate. These loans are credit-scored and rated according to the perceived risk of default. A default is simply where the business cannot afford to make the loan repayments and the investor doesn’t get their money back. Websites such as Money&Co allow potential investors to put in a bid for lending money by entering how much they are prepared to lend and what interest rate they require to be paid. In the near future it will be possible to package up these loans into a portfolio that can be held in an ISA as a riskier but potentially more lucrative version of cash ISAs.

This will be an area of investing that will develop over the next few years, and while risky, it will be one to watch.

David Hill is a Chartered Financial Planner and Trust & Estate Practitioner at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814, email [email protected] or see www.hillsfinancialplanning.co.uk