What are the financial considerations of crowdfunding?

The business world is increasingly competitive. While it's one thing to come up with a superior idea, getting it turned into a product, service or offering naturally takes capital. Consequently, more companies are turning to crowdfunding as an alternative to traditional means.

This is even more true of startups. Starting a business in Australia is by no means easy, and new, innovative ways to secure the applicable finances are proving popular with smaller companies in particular.

What is crowdfunding?

Crowdfunding is the exercise of gaining capital from a large pool of parties who all give a small amount of money. By embracing the power of the internet in particular, the practice allows businesses of all sizes to gain access to thousands, if not millions of potential investors, according to the UK Crowdfunding Association (UKCA)

The first crowdfunding project supposedly happened in 1997 courtesy of rock band Marillion. At the time, the band couldn't afford to tour, so they asked their fans to support shows across the US. After engaging with them online, the band managed to raise US$60,000 and crowdfunding as it is known today was born, as noted by the UKCA.

The legislative requirements 

Crowdfunding is proving more popular on these shores, and the Australian government is taking steps to assess its economic impact, and correct or change any of the applicable business legislation.

In fact, a consultation paper aimed squarely at the regulatory framework around crowd-sourced endeavours is under review. It falls into line with promises made by the government in the 2015 Budget, in particular, the AU$5.5 billion committed to the Growing Jobs and Small Business package. 

One of the most notable pieces of proposed legislation is that individual retail investors will only be able to hand over $10,000 at a time. However, most crowdfunded entities tend to seek smaller amounts, so this may only be an issue with particularly large endeavours.

The accounting considerations

Research published by the Association of Chartered Certified Accountants suggested that one of the pitfalls of crowdfunding is that the impact of the funds can be difficult to measure on a large scale. While it's fine for companies who have one idea or product, those with many will have to streamline crowdfunding efforts within their wider financial practices.

Consequently, seeking out the appropriate tax and accounting services is crucial. Crowdfunding certainly has its advantages, but the influx of capital must be tracked and managed carefully if the business is to garner a precise idea of how its performing financially.