Crowdfunding is a way of raising finance by asking a large number of people each for a small amount of money. Until recently, financing a business, project or venture involved asking a few people for large sums of money. Crowdfunding switches this idea around, using the internet to talk to thousands – if not millions – of potential funders.

Those seeking funds will set up a profile of their project on a website and then use social media, alongside traditional networks of friends, family and work acquaintances, to raise money.

There are various types of crowdfunding which are defined here:

Reward-based crowdfunding

Reward-based crowdfunding is where entrepreneurs pre-sell a product or service to launch a business concept without incurring debt or sacrificing equity/shares.

Reward-based crowdfunding has been used for a wide range of purposes, including motion picture promotion, free software development, inventions development, scientific research, and community projects.

Equity-based crowdfunding

Equity-based crowdfunding is where the backer receives unlisted shares of a company, usually in its early stages, in exchange for the money pledged. The company's success is determined by how successfully it can demonstrate its viability.

Donation-based crowdfunding

Donation based crowdfunding is whereby people can raise money for personal matters, or community projects.

Hundreds of internet platforms are available to support crowdfunding. It is recommended that you read carefully their terms and conditions of use before using their services and/or offering any funds toward a project and/or starting your own campaign.

New policies on Crowdfunding written by the Financial Conduct Authority (FCA) came into force in April 2014 and apply to equity based crowdfunding and peer to peer lending. More information about these regulations can be found on the FCA website.