Crowdfunding

Crowdfunding, as the term implies, is a practice in which a large number of people pool money together to finance a project or raise funds for an individual or organization. This means can be taken advantage of by business owners in need of capital.

Fund providers give out money in exchange for future interest payments and capital repayment eventually, this is known as Loan-based crowdfunding.

Investment-based crowdfunding comes with the opportunity to own securities by providing funds. Investors will get shares in the business in exchange for capital.

Another form, known as Reward-based Crowdfunding, attracts non-financial returns to the investors or often no return which can be as an act of benevolence.

In Nigeria, the Securities and Exchange Commission regulates the operation of crowdfunding businesses. According to this regulation, micro-enterprises cannot raise more than ₦50million, small businesses ₦70million while medium enterprises have a limit of ₦100milion. More information can be gotten from SEC’s rules and regulations on crowdfunding by clicking this link.

The good side of crowdfunding is that entities can easily and quickly meet the targeted amount for projects and ventured alongside.

• Little or no cost is incurred to source for funds.
• It serves also as a means of getting feedback on the public’s opinion of the offer and can attract expert opinion and suggestions for improvements.
• Social media is used to publicize the need for funds, asides from reaching a large number of people, this means can also help to create awareness of the business thereby doubling as an advertisement.
• It saves business owners of the rigorous process and requirements of obtaining a corporate loan.
• It gives an opportunity to small investors to be included. Investments can be made in little amounts to various projects.

Disadvantages

• In the event that the project fails, the name of the business and fund providers are at the risk of being dragged in the mud.
• Investors need to understand the project, but a showcase of ideas can be imitated by competitors.
• If target finance is not met, all funds are usually returned to the providers.
• It will be difficult for businesses with a low social media presence to gain popularity and generate support.

Crowdfunding as a source of raising capital for SMEs may not be always suitable at all times and for all businesses. The nature of the business and timing should be considered before deciding to pursue crowdfunding.

Each type of crowdfunding has its peculiarities which have been highlighted above. Loan-based involves repayment of capital with interest, requiring the services of an accountant to prepare a loan payable schedule to show the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term.

Investment-based crowdfunding also called equity-based involves pledging securities in exchange for funds, thereby making them shareholders. When a dividend is declared, investors are to receive their portion according to the number of shares they own. Therefore, the business owners need the services of an accountant in sharing the declared dividend.

Business owners will also be required to give an account of how the funds were spent and the profitability of the venture. They are hereby advised to engage the services of credible accountants, one of which is accounteer.

Should you need professional accountants to prepare your books, send an email to team@accounteer.com