Startups and treps look to crowdfunding and microfinance as alternative capital channels

EY - Crowdfunding and microfinance

Treps with early-stage companies face challenges in securing funding. Most formal investors, such as VC firms, are unwilling to make investments at the seed stage. With seed capital increasingly difficult to source, alternative funding mechanisms — such as microfinance and crowdfunding — could help fill that gap.

In our report, G20: Funding the future – the financing landscape for entrepreneurs, we analyzed some of the opportunities and issues around access to finance for treps in the G20 markets. Here, we're looking at crowdfunding and microfinance, two alternatives to traditional financing.

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Microfinance comes to China's micro-entrepreneurs

CreditEase, China's inclusive finance and wealth management company, utilizes innovative models, such as support groups and peer-to-peer lending, for risk control and funding in areas of China where there is a dearth of available finance.

The company's target market is micro-entrepreneurs in both urban and rural areas who cannot access traditional sources of funding. TANG Ning, the company's founder and CEO, estimates there are between 50 million and 100 million micro-entrepreneurs in Chinese cities, with an additional 100-200 million in rural areas, all looking for credit.

With a proprietary credit-scoring system that assesses an applicant's creditworthiness, CreditEase makes a recommendation in terms of the amount, duration and interest rate. Lenders receive a rate of 8% to 12%, while borrowers pay a total cost averaging 20%. The average loan duration is two years, with losses of about 2%.

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The online route to funding

Crowdfunding, a form of peer-to-peer lending, is emerging as way for treps to attract small amounts of funding directly from multiple investors using social media and internet channels. In the past few years, crowdfunding has become increasingly popular, particularly in creative industries such as film and publishing and social enterprises.

In the US, crowdfunding has strong political momentum, with President Obama describing it as a key part of “the backbone of an America built to last.” The Jumpstart our Business Startups (JOBS) Act included provisions to expand the use of crowdfunding. Under the Act, treps would be able to accept and pool donations, although these would be limited to the lesser of either US$10,000 of the investor's income and a maximum of US$1m in a 12-month period.

Based in the UK, Crowdcube is an online funding platform that allows companies to raise equity funding directly from members of the public. Treps create an online pitch and then promote it to people who might want to invest in their business. The site also allows companies to spread the word using social networking tools such as Facebook and Twitter. The company operates an all-or-nothing funding model so that, if treps don't reach their funding target, investors get their money back.