Human ingenuity is a pretty impressive quality. Block the obvious route to getting somewhere, and pretty soon someone will have come up with a cunning plan to get there some other way. Turning for a second to the usual subject matter of this blog, in many ways the history of tax avoidance schemes is the tale of human ingenuity; as one route to tax saving is blocked, someone will open up another. It is only the depth of the current financial crisis that has both moved the ‘moral goalposts’ sufficiently to make it broadly acceptable, and made the requirement for tax revenue sufficiently desperate to make it absolutely necessary, to seek to block that ingenuity once and for all by introducing a General Anti-Abuse Rule.

So when the banks responded to being baled out by the UK government by taking their lending ball home (bank lending to businesses has been shrinking since the end of 2008), people were bound to come up with alternative sources of finance. The government’s response to its inability to persuade the banks to loosen their purse strings (as I said at the time, the baled-out banks should have been nationalised) was to bring forth the Seed Enterprise Investment Scheme, which offers an unprecedented 50% tax relief plus capital gains tax exemption for equity investment in small trading companies in 2012-13. Meanwhile, others have been pursuing even more innovative solutions.

I have blogged previously about the St John’s Sunshine project in Old Trafford, which is a fine example of an innovative approach to funding a project. St John the Evangelist parish church installed solar panels, funded by a mixture of investment and donations from parishioners, other members of the local community and general well-wishers. Structured as a co-operative, St John’s Sunshine Limited will use revenue from solar power generation (to provide power for St John’s Church Hall) and export of surplus power to the National Grid to fund projects for the benefit of the local community, as well as paying a modest income to those investors who wish to receive it.

But there are also other funding models which might at first sight appear unlikely, but can in fact prove successful. Such a model has been used to fund the Bicycle Academy, a provider of budget bicycle construction courses based in Frome, Somerset. Andrew Denham, the founder, had no access to funding for premises or equipment, and in the current banking climate, little prospect of obtaining bank funding. So he opted for the radical alternative of ‘crowdfunding’.

In concept this is simple; Mr Denham put his business proposal on a website and asked the general public for money. The cynics among us might have put his chances of success pretty low, but we would have been wrong; he raised the £40,000 he needed within 6 days of the 6 week target he had set himself.

Donations at particular levels qualified donors for a variety of benefits. Donors of £20 received a T-shirt, while somewhat more substantial donors qualified for bags or model bikes. £300 donors received a place on a 1-day bike building workshop, and £500+ donors were able to reserve the first places on the commercial 4-day course run by the Academy.

One of the major donors says he had the money available, wanted to see it happen, and thus was keen to put money in and encourage others to do so. One factor in this may have been the social enterprise element of the Academy (in my experience, increasingly a factor in businesses set up by younger entrepreneurs), whereby the first frame made by each student is donated to a charity in Africa.

The background of crowdfunding is in the US, where it has been used on a regular basis to finance band tours, album recordings and films, but in the UK it is now expanding beyond the arts into the business sector. Oliver Morgan of Universal Fuels sold a 24% share in his fuel oil delivery business for £150,000 using crowdfunding website Crowdcube (the majority to one single investor), which he compares favourably to the stakes that were demanded by venture capitalists for similar investments.

Crowdcube allows a minimum investment of just £10, and also allows start-up companies to sell shares through the site; there are also other UK sites such as start-up site Seedrs which are contributing to the UK leading the world in this area, with US attempts to allow sale of shares through crowdfunding websites mired in predictable American legal difficulties.

And therein, trans-Atlantic jibes apart, lies one of the difficulties of crowdfunding as an avenue for attracting equity investment as opposed to donations. Taking subscriptions for shares is actually a highly regulated activity (understandably, given that investors are entrusting their money to total strangers), but even putting aside the risk of fraud, equity investment in micro businesses is a high risk activity, with a very high failure rate, so as ever the watchword is ‘caveat emptor’ when looking at crowdfunding investment opportunities.

Having said that, the availability of 50% SEIS tax relief, or even 78% for those with capital gains to re-invest, has definitely highlighted the potential of crowdfunding as a source of finance for the micro business, and also arguably decreased the true risk inherent in such investments. And the final word In praise of crowdfunding comes from Andrew Denham of the Bicycle Academy, who describes his donors as “183 evangelists of the Bicycle Academy – they help support us, they help promote us, and that’s invaluable”. So don’t discount crowdfunding, whether you are a micro business owner with more ideas than cash, or a potential investor looking for the right opportunity.