Crowdfunding will not replace traditional loans

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The trend towards crowd funding could be seen as a threat to traditional financial lenders, but it is not suitable for most businesses and should not threaten traditional banks.

To fund a startup, expand a business or launch a new product requires capital, and often this is acquired through a loan, from either a high street bank or an independent bank. Crowdfunding is an alternative form of raising capital in which many people pledge small amounts of money.

One market that has been using this model successfully is board games, where people pledge an amount of money and in return are the first to receive a copy of the game or, other added value perks if they pledge larger amounts. The money raised is used by the board game company for final product development, and it then funds the printing and packaging of the finished game.

Crowdfunding works for business that are launching innovative new products that appeal to a niche market of people prepared to pledge the requested amount. More traditional businesses, such as insurance companies, plumbers and retail shops, are less likely to find the crowdsourcing model useful. If capital is needed, then traditional commercial loans and bridging loans are appropriate.

Many financial experts, including David McCarthy of the online Atom Bank, believes that at least for the next few years, crowdfunding will not replace traditional finance.

The Financial Conduct Authority has warned potential crowdfunding investors to take care, as it regards crowdfunding as a high-risk investment activity.

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