Is funding going social?

When I speak to small businesses on the Wirral, one of the main things they are concerned about is funding.

This isn't just bank lending (although that is a big part of the picture), but also some of the other sources of funding and investment like the Merseyside Special Investment Fund and the North West Development Agency, which may no longer be available.

This has an impact on businesses right through their life cycle. Not just for start-ups and those looking for investment to fund growth and expansion, but also when the owner explores a management buy-out or a sale to realise the value they have built up.

All of these stages have traditionally often needed some external investment (whether a simple bank loan, an equity investment or some combination of the two).

Against this background, I have reading a lot recently about "social funding"... where the bank, equity fund or other institution falls out of the picture and the investment or loan is made directly by a number of individuals.

The best known example of this in the UK is probably Zopa (tagline - "everybody wins except the fat cats"). This is a peer to peer lending service which matches those who want to lend money (and secure a better return than that available from the banks) with borrowers. Loans are split between several borrowers to spread the risk. At the time of posting Zopa claimed to have over two million pounds available for lending on its market... although it is actually aimed at personal loans rather than businesses.

Businesses may be more interested in Funding Circle, which is a new peer to peer business lending service, which allows businesses to borrow up to £50,000. This operates in a similar fashion to Zopa by cutting out the banks to allow businesses to borrow at reasonable rates and lenders to make a decent return. It isn't really for startups though as businesses need to have two years of accounts and a decent credit rating to apply.

The Liverpool Daily post ran an article on social lending this week which has some more detail on these two services.

There are a few more innovative options available for startups. Kickstarter is a social funding site which allows people to pitch an idea and invite others to pledge money to get it started. This isn't a lending service - the money is effectively a donation and won't be repaid.

The twist is that the funding is "all or nothing". Businesses set a funding target... if they acheive or exceed it then the money is paid over, but if not then they get nothing. This is better for the investors as you don't want your money going into the project unless enough funding has been pledged to follow it through.

It also allows people to see whether the market will support new business ideas in a risk-free way... if the market doesn't want to fund your project then you will know before you spend too much of your own time and money on it. The highest profile recipient so far has probably been the open social network project Diaspora, but a look on the site shows there are plenty of others asking for, and receiving, investment.

Unfortunately, Kickstarter is US only. There are some other colaborative funding services which are available in the UK such as IndieGoGo, but this seems to operate on a "donation" basis. Any money donated is paid over whether or not the funding target is reached, which may be less attractive than the Kickstarter model.

Will this type of social funding become mainstream? The market in the UK is at a early stage, but a continued squeeze on more conventional forms of funding and a growing "social" mindset could be just what is needed to make this a serious alternative for businesses.

There are a lot of regulatory hurdles, but I could even see an equity investment version of the Kickstarter model which allowed companies to crowdsource investment in return for an equity stake in their company. That would really make things interesting...