By Jeremy Pannell, senior corporate finance manager, Triodos Bank UK
Most charity leaders will be familiar with the idea of crowdfunding, but unless you’ve had direct experience, some common misconceptions can make it tricky to understand exactly what crowdfunding involves – and whether it might work for your charity.
For anyone unfamiliar with the concept, crowdfunding works by connecting organisations or individuals who need to raise money with a large number of people (a ‘crowd’) willing to donate to or invest in their cause.
One of the first points to clarify is the difference between what we refer to as ‘gift crowdfunding’ and ‘investment crowdfunding’.
The former allows people to donate money to an individual or organisation, therefore there’s no repayment involved. Investment crowdfunding is a means of connecting organisations that need to borrow money with individuals who want to invest in a cause with the hope of making a return over time.
Here, I’ll be focusing on investment crowdfunding.
Regarding charities, investment crowdfunding works by giving people the opportunity to invest in a charity initiative through the purchase of bonds. The money raised in this way is paid back to investors with interest over an agreed timescale.
How does investment crowdfunding differ from a loan?
Investment crowdfunding can be a useful way for charities to borrow money without the need for the assets they would usually have to offer a lender as security. So for charities who don’t have those kind of assets – or would prefer to avoid securing lending against them – crowdfunding can offer a useful alternative.
We’ve also worked with charities that would rather not approach their donor base for extra funds and instead take the opportunity to reach out to an ecosystem of investors who are looking for both a financial and social return on their money. In turn, investors can see how their money is being used for something tangible that improves the lives of others.
As such, investment crowdfunding can give charities a means of engaging with a new audience of potential supporters by raising awareness of their work among an ecosystem of investors. For instance, our own crowdfunding platform has several thousand registered users and most of our charity bonds are supported by a PR campaign so the process of raising capital in this way can be great for building the visibility of the charity.
Some of these investors may also wish to maintain their connection to the charity beyond the life of the bond, perhaps by becoming longer-term donors once their debt is repaid.
What to consider
While crowdfunding offers many benefits, there are a few points to consider if you wan to go down this route.
Investment crowdfunding has often been associated as a means of raising money for start-ups, but it’s usually far better suited to mature and operationally resilient charities who can demonstrate their ability to repay.
For the investor, investing in this way does not carry the same protections as depositing money in a savings account which is protected by the Financial Services Compensation Scheme (FSCS) within certain limits. Investors in a charity bond are directly exposed to the financial performance of the charity and its ongoing ability to repay the borrowing. In light of this, we work very closely with charities and social enterprises to assess their likely ability to repay the borrowing before we launch the offer publicly.
As the risks are higher for investors than, for example, investing in a savings account, charity bonds are typically a slightly more expensive means of borrowing for charities compared to bank loans.
Bonds raised via a crowdfunding platform also tend to have a shorter term than bank loans. Whilst a bank loan might be repayable over 20-25 years, members of the public are usually resistant to investing over that timeframe so most of the charity bonds on our own platform have a 5-7 year term.
Crowdfunding in action
We’re currently the only bank with a crowdfunding platform and, as we focus on making money work for positive change, we often work with charities.
In our experience, investment crowdfunding can be a useful means for charities to access funds for a new project, facility or property. For example, a £3m crowdfunding bond raised in 2020 helped the Robin Hood Group YMCA to create its new Community and Activity Village in Newark, Nottinghamshire – a community-led venue including sport and wellbeing facilities, plus education, hospitality, childcare and youth development programmes.
The crowdfunding support gave the charity the extra funds it needed to complete the project and, today, the Village brings people of all ages and backgrounds together. Newark and Sherwood is ranked as one of the areas in the country most affected by social deprivation and the new facility forms part of the charity’s aim to improve social mobility in the area.
As well as a useful means to raise money for individual projects, investment crowdfunding is often used to support charities with their growth aims.
For instance, in May 2022 we launched a £1.5m bond for London Early Years Foundation, one of the UK’s largest charitable social enterprises, which was promoted through our crowdfunding platform. The funds are supporting its ambition to provide 10,000 children across Greater London with access to high-quality and affordable Early Years education, particularly those from disadvantaged backgrounds.
The seven-year bond offer was designed with LEYF to meet its particular requirements and fits with our own mission to promote inclusion and equality.
If you’d like to find out more about crowdfunding, the UK Crowdfunding Association (of which we are a member) offers a range of guides and resources.
