What is crowdfunding?

Types of investment

What is crowdfunding?

By Michael Trudeau

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What is crowdfunding?

Discover the basics of crowdfunding, including the different types available and what protection you have if things go wrong. 

Have you ever fancied yourself as the next Duncan Bannatyne or Peter Jones, investing in fledgling businesses in the hope that they make millions for you? 

Well, you don't need vast wealth to become the next Dragon in the Den - a new way of investing in start-up companies called 'crowdfunding' lets you fund their growth for as little as a fiver. 

This guide explains the basics of crowdfunding, the different types available, and what protection you have if things go wrong. 

How does crowdfunding work?

Entrepreneurs and small businesses with an idea, but who are struggling to get funding through more traditional channels such as high street banks, are now turning to specialist crowdfunding websites to raise the capital they need. 

For as little as £5, you and other interested investors can give a leg-up to a startup, fund a film or theatre production, help a musician make an album or even give financial backing to a revolutionary new gadget. 

By investing through these websites, you can choose projects you're interested in, send questions to the people behind them, and assess whether or not to part with your money. In return - if things work out - you could see share prices soar, receive rewards in the form of dividends or, less traditionally, a finished product or service. 

Go further: The beginner's guide to investments - find out the basics of investing your money

The different types of crowdfunding

There are two different types of crowdfunding. One type sees you investing in shares or giving a loan to a company to get a financial profit; the other sees you getting rewarded in other ways, such as getting your hands on a prototype of a gadget you've funded. 

Crowdfunding for a financial return

  • Equity crowdfunding - buying shares in companies to get a return by selling your shares at profit and/or receiving dividends. 
  • Debt crowdfunding - providing a company or project with a loan which is then repaid to you over time with interest. 

Go further: Equity crowdfunding explained - read more about these websites in our guide

Crowdfunding for a reward

  • Reward crowdfunding - the chance to get your hands on a product, be given an opportunity to get involved in a project, or to receive a credit for your financial backing. 

Go further: Reward crowdfunding explained - learn more about the different types

  • Last updated: February 2016
  • Updated by: Michael Trudeau