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Crowd Funding And Impacts Of Raising

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Questions:

1.Traditionally, businesses raise funds using cash on hand or from shareholders or banks or venture capitalists or angel investors or using any mixtures of these means. How does crowdfunding differ from these means?

2.What are the advantages of crowdfunding to the investors and to the businesses? What are the disadvantages of crowdfunding?

3.How may the spread of crowdfunding influence the businesses of MNEs? Will the influence be positive or negative or both or none at all?
 
 

Answers:

Introduction

A business is a transformation of a person's idea into reality. It costs everything to start up a business in terms of physical efforts and monetary values. This is how the concept of 'Financing' came into existence. To be someone's reality from an idea, a person needs funds or more precisely, capital to set up his business and execute its operations and make profits. Considering different type of business, the different sources of fund can be raising of money from public, investments from relatives & friends, self savings and loans from banks & financial institutions. Our study is based on the concept of 'Crowd funding' that has come into existence and is significantly used by a number of businesses (Fridson & Alvarez, 2012).

1. Let us first discuss the various types of funding that were widely used before and are considered as traditional approaches these days.

  • Own Capital: A person may have his own life time savings which he may invest to start up his business. The main advantage of it is the capital is of self and therefore, no burden of interest will arise. However, an opportunity cost is associated with such funds. For example, such funds could have been invested in some profitable company or could have been deposited as fixed deposits (Ittelson, 2009).
  • Friends & Family: these are the people who are mostly approached first or rather because of their influence and support in both monetary and emotional terms, a person sets his mind to start up a business. It is important for a person to determine the nature of such funds. For example, whether it has been invested as a loan or equity investment because a loan giver would take an interest payable at regular intervals and an equity investor will take shares of a company and will form a part of the ownership of the entity. This is however suitable when a small amount of investment is required and also, there is a strong network among people. Also, the risk is comparatively low (McLaney & Adril, 2016).
  • Small Business Loans: Borrowing from the bank is basically in the form of overdraft facility. It is for meeting the short term initial requirements like working capital needs, that is, making a balance between the expenses and income or cash outflows and cash inflows. Loans from banks carry low risk on the part of bankers because banks provide loans after proper scrutiny and after having a security against such loans. Also, these type of loans carry a high interest which may crate a burden in the future of the business if adequate profits are not earned.
  • Early Investors: These investors consider various business plans and invest their money in such business plans they think are strong enough and will have future profits. These investors are like angels to the owner of the business model as all it takes for a person to win the confidence and trust of such investors in their plans. These investors open up the doors for such business planners. Such investors usually invest money on an agreement basis and may either take shares of the company, or became a partner of the business and behaving as a nominal partner or a dormant partner.
  • Equity Investment: If a company is limited by shares, it can raise funds through public offer if securities where the funding will be done by the equity holders and they will get a return in the form of dividend (Lerner, 2009). In such a case, while bringing an offer of public issue, it is mandatory for the company to clearly state the purpose of such funding and how it is proposed to be spent and such other details as required.
 


Such approaches are the ways opted since the revolution of business came into existence. However, with advancement in technology and science, newer and newer ideas coming into effect, another trendy source of fund called as 'Crowd funding'. Various platforms such as Pledge Me enable funding through sources such as loans, equity campaigns and donations. Crowd funding is useful for an entity if it has a strong network among people and has a strong recognition and relations in the market. A strong social background is necessary if a person wishes to fund his business through crowd funding. Also, the crowd funding business can come into effect only if the purpose of it connects with the public and infect, it is mandatory to have the public and such other persons to have a clear understanding of the business and its operations targeted (Girard, 2014).

We cannot disagree that crowd funding is taking up the most popularity these days although the traditional approaches are still relevant. Where crowd funding is an approach of raising money from various individuals, fund raising is an approach of asking for a financial support. The traditional sources are an offline approach that is, fund raising; marketing, branding, campaigns for creating awareness, etc are all done offline. But, the crowd funding, being a modern approach is done online using electronic platforms such as Milaap. Traditional sources comes from those people who see a benefit in your business and are liable to receive those additional benefits they may receive in terms of interest, dividend, profits, etc. However, crowd funders are those people who invest because they believe in a person's idea (Piper, 2015).

 


2.
The crowd funding, being a popular source of fund raising, also has certain advantages and disadvantages. It may seem attractive to a majority but it can still be not a good idea for some. The advantages of crowd funding can be in different terms to both investors and the business. There is no clear answer to this query however, three reasons can be considered as the advantages for investors:

  • It reduces costs: Internet has now become the means of business. Because of it, buyers and sellers have come in direct contact without many efforts. It is a matter of having timely and adequate information on the internet through which investors can gain efficiently. Such fundraising approach reduces the transaction costs and search costs and encourages more and more participation in the market.

When an individual wants to make an investment in a profitable company, it has three options - firstly, it can find a company on its own and manage the investment alone, join some angel investors group and make investment as directed (Kuti, 2014). As a result, it is a task for a potential investor to identify a company with good plans and also, such decisions require a good network. Costs such as legal formalities cost, background checks cost, and equity documentation costs, fees for finding etc are being minimized. The crowd funding website minimizes the cost by standardizing the legal documents, background check up procedures, and other expensive expenses, therefore, in case of other costs, the investors pays nothing.

  • Higher Returns: The returns that are made on the crowd funding equity are larger than those offered by other assets. A right investment can increase the value of the initial investment. It is probable that all the projects may not turn out to be successful, but in a market that is recording low interest rates, bond yields & annuity rates, the investors these days are attracted to equity crowd funding more (Siciliano, 2015).
  • Tax Advantages : Taxpaying investors can enjoy certain benefits such as claiming exemption under Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS), under which an exemption of 50% and 30% in the investment as a relief subject to certain conditions. For example, holding of shares for three years.
  • Other Rewards: The crowd funding scheme offers other rewards in the form of discounts, offers, coupons, recharges, etc.
  • Recognition of Small Investors: There are numerous Investors that aren't recognized because of being able to invest a small amount and therefore, at times, don’t get an opportunity to participate in the market. Crowd funding concept offers diversification, helping such investors to have a value of their investment (Loughran, 2010).
 


The advantages of crowd funding to the business are:

  • Provides Access to Capital: The crowd funding concept has made easier for the startups to raise funds without getting into complicated procedures of business. Such investors are more interested in the execution of the plan rather than the return they might receive on the investments.
  • Minimization of risk: Since the funds are received from a large number of investors, the overall risk is less than receiving capital from one or two sources.
  • Other benefits along with Money: The investors being interested in the execution of the They provide other benefits like providing feedbacks, comments and different ideas that helps an entity in its early stage.
  • Increases marketing and a network of investors: Such raising of fund brings an entity in contact with numerous investors and therefore, a marketing of the business is also done.

Where there are advantages to both the investors and the business, there exists disadvantages also of this idea. Let us enumerate the disadvantages of this modern approach (Rayman, 2009):

  • It should be thoughtful and expects hard work: A lot of efforts are included like preparation of an eye appealing profile, interesting video for convincing investors, thoughtful marketing, execution of campaigns, etc. Such efforts may not be worth.
  • No guarantee: There is no guarantee whether it will succeed in its aims or not. It is either all or nothing. It is the trust and confidence which is the foundation of such raising of funds which may shake in case of a downfall (Pratt, 2009).
  • Fraud: Most of the crimes are happening online these days. It may happen that an impressive business plan aims to deceive a large number of investors and thus, shaking the trust on the concept of crowd funding (Smith, 2016)

3. Crowd funding, being a popular source of funding, isn't at the bottom level rather the concept of this modern approach has spread to big companies including multinational enterprises (MNEs). Such MNEs are in support of this approach as it uses an e-platform and gives recognition to both small investors and business plans of small vendors (Bragg, 2016).

 


Such MNEs direct their departments to study the concept of crowd funding as such MNEs target to invest in proven business plans and so as to influence one's life by bringing a life in its business plan (Lacasse, 2016). These MNEs often make huge investments in one go and has huge investments in return; in that case, funding small numerous business plans is no big deal for them rather they are like angels to these startups. In such a large population, to reach all the targeted people, Internet is the most easy source to reach to a thousand of people at one go and similarly, investors comes to know about varieties of plans and so according they make their decision. MNEs uses such crow funding websites to search potential plans and make investments to have a favor in return maybe, or to let small vendors get an opportunity of bringing their dream into reality, etc (Case, 2012).

The diagrams shows us an analysis of approx funds raised during past few years depicting the growing popularity of the crowd funding approach. The pie chart signifies the using of such fund raising approach over traditional approaches, that is, for example, equity funds (Mattessich, 2016).

Such an influence will have a positive impact on the lives of both business startups and MNEs. For a business startup, it acts an an opportunity to turn into reality and for an MNE, it is more likely of doing good for such small projects in comparison to the revenues earned by them and developing a network for itself and generating goodwill out of it. Also, such investments will boost the confidence of these vendors in their business plans while it will create a favorable impact on the social and economic environment of such MNEs  (Paul, 2014).

Conclusion

It is not that all the projects are going to succeed being funded by crowd funding, but a well informative plan if executed well can make money and bring benefits both in terms of happiness and money. However, we should consider the fact that crowd funding is still unknown to a huge population inspire and therefore; inspire of increasing usage of mobile phones & internet, therefore, awareness is to be created to make this approach more popular. It is likely to happen by 2025 that crowd funding approach will overcome the traditional approaches and internet will became the most useful medium for fund raising (Herciu, 2017)

 

References:

Bragg, S. M. (2016). GAAP Guidebook. [S.I]: AccountingTools, Inc.

Case, P. (2012). Environmental Risk Management and Corporate Lending: A Global Perspective. Boca Raton, Fla.: CRC.

Fridson, M., & Alvarez, F. (2012). Financial Statement Analysis: A Practitioner's Guide. New York: John Wiley & Sons.

Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.

Herciu, M (2017), "Financing Small Businesses: From Venture Capital to Crowdfunding." Studies in Business & Economics, 12(2), pp. 63-69

Ittelson, T. (2009). Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. Franklin Lakes, N.J.: Career Press.

Kuti, M. (2014). Crowdfunding: How to Fund Your Business Idea. Retrieved from www.business.gov.au: https://www.business.gov.au/info/run/finance-and-accounting/finance/crowdfunding-how-to-fund-your-business-idea

Lacasse, R. M. (2016). Digital-Tsunami-Site-Web. Retrieved from https://fintechlab.ca: https://fintechlab.ca/wp-content/uploads/2016/11/Digital-Tsunami-Site-Web.pdf

Lerner, J. J. (2009). Schaum's outline of principles of accounting. New York: Schaum.

Loughran, M. (2010). Auditing For Dummies? Hoboken, NJ: John Wiley & Sons.

McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United Kingdom: Pearson.

Mattessich, R. (2016). Reality and accounting. [S.I.]: Routledge.

Paul, K. (2014). Managing extreme financial risk. Oxford: Academic Press, Elsevier.

Pratt, J. (2009). Financial Reporting for Managers: A Value-Creation Perspective. Hoboken: John Wiley & Sons, Inc.

Piper, M. (2015). Accounting made simple. United States: CreateSpace Pub.

Rayman, A. (2009). Accounting Standards: True or False? . New York (Estados Unidos): Routledge.

Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.

Smith, O. (2016). The good, the bad, and the ugly side of crowdfunding. Retrieved from www.thememo.com: https://www.thememo.com/2016/02/18/crowdfunding-good-bad-ugly/

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