Crowdfunding is an efficient way to connect small businesses to small quantities of capital (read, general public/individual investors). It creates a funding opportunity that was previously unavailable to small businesses. It helps small-business owners pitch their business plan to a large number of people on the web.
Small-business owners are looking for alternate methods of funding. They’re ready for options beyond traditional bank loans and borrowing from friends & family – and crowdfunding appears to be a popular and powerful alternative.
A common misconception is that crowdfunding is only for start-ups. This is not true. It’s a great resource for small businesses that may need to raise capital to expand their product range, purchase new machinery, etc. Because of its mass appeal, it offers the potential for building a customer base. Most of all, crowdfunding takes the pain out of scouting for capital.
Juliana Desmond’s aspiration as an entrepreneur helped her raise funds. Her love for sustainably produced chocolate and sculpture urged her to scale up her operations. But, as with most cases of small businesses, her access to capital was difficult.
Help came from Kiva Zip. Kiva Zip provides interest-free loans up to $5,000 for small businesses. These loans are crowd-funded, $25 at a time. With this funding, Juliana bought packaging supplies, a chocolate temperer and moulding.
Juliana isn’t alone. Today, raising funds is much simpler, quicker and easier for a determined business owner. Since no amount is too little with crowdfunding, it is beneficial to both investors and businessmen.
Sometimes, small things make a big difference…
The term “small business” may be misleading. Small businesses can actually do bigger things. They have a larger impact on the economy than we presume. Small businesses are important to innovation and create jobs. They are a mainstay of the economy.
There are over 27 million small businesses in the U.S., with a turnover of $6 trillion. They provide employment to 55% of the population. These businesses create 90% of the new jobs in America. [Source: iCrowd]
Superb statistics! So would it be right to say, “Great things are done by a series of small things brought together.” Are things that rosy?
Not really. There’s another side to the same story. More than 40% of small businesses need financing, but are unable to raise funds. If they could raise funds, 55% of them would hire at least one person. This would cut the unemployment rate in the U.S. by one third. No wonder then, nearly 60% of the businesses that need capital are considering online business funding options.
Courtesy of: Lending Club Small Business
What does Title III mean for small businesses?
Investment crowdfunding is the new buzzword. A revolutionary change in the crowdfunding space occurred after Title III and Regulation A+ under the JOBS Act were passed. This easing of federal regulations will allow the general public to participate in the entrepreneurial ecosystem.
The Securities and Exchange Commission (SEC) has permitted small businesses to raise up to $1 million through crowdfunding platforms. Further, non-accredited investors can invest up to the greater of $2,000 or 5% if their net worth or annual income is less than $100,000. Investors whose net worth is more than one million dollars can contribute up to 10% of their annual income. This offer and sale of securities on crowdfunding platforms is called equity crowdfunding. Some states have passed their own equity crowdfunding bills, so the upper limit on the amount raised through crowdfunding can vary. To check out if your state allows equity crowdfunding, visit the Intrastate Crowdfunding Directory.
Title III releases an immense pool of capital to small businesses. This is likely to accelerate growth, create jobs and fund innovative ideas. When small-business owners go through the fundraising process, it is likely that the entire business environment will become more competitive. Small businesses that do not have venture capital networks or angel investors can hope to access capital more easily.
Crowdfunding – A better and alternative financing option?
Once you enter the crowdfunding platform, you will know whether you’re ‘crowdfunding ready’. Theoretically, crowdfunding may seem like an easier alternative, but raising money is always difficult. To run a successful campaign, you need to put in some real hard work and be persistent throughout. Yet why is crowdfunding a better and alternative financing option for small businesses? Here are the reasons:
- Bank loans lack transparency – Small-business owners still don’t feel that bank loans are the best option available. There is a lack of transparency in interest rates. The actual cost of financing is much higher than the perceived cost – An affordable interest rate is considered an important factor when applying for a loan.
- Realistic targets – Crowdfunding helps you set realistic targets. When you ask for money, you can’t just go out there with a vague plan and say, “Fund me”. You must be specific and ask for what you really need.
- Control – This fundraising model allows you retain control over the business. You give the investors small, tangible rewards. You avoid giving up bulk of your equity, as is the case with venture capital funding.
- Product display – As small-business owners, you can offer small rewards in exchange for donations. This way you get a chance to showcase your product. Small -business owners are also using Facebook and Twitter to tell their stories to gain a following.
The above section is specific to small businesses. Check out Crowdfunding for Startups to read more about the general benefits of crowdfunding.
How to make crowdfunding work for you…
- Sound business plan – Planting your idea on a crowdfunding platform is no guarantee of backing. You need to have a sound business plan and a marketable product. You have a picky audience out there. You need to convince them about the business viability of your idea.
- Backers – One of the key drivers for a successful campaign is the number of backers. Your family, friends, local communities, and friends of friends are the ones who will support your campaign at every stage. They will not only fund your campaign, but also promote it by sharing on their Facebook and Twitter accounts. Once you build the traction, more backers will follow suit.
- Sales pitch – A sound business plan and sales pitch are essential ingredients to raising funds through crowdfunding. Small business owners will need to carefully plan the pitch before posting it online. A compelling pitch can be in the form of a video. You can post this video on social networking sites. These videos need not elaborate on the “what you do” part. Instead, they can focus on the “why and how” of the business. Doing this will help the audience get more insight into your plan of action. The chances of raising funds are almost double with an effective video presentation.
- Decide on your Fundraising model – Three different fundraising models can be used to attract investors. The common one is rewards-based funding, which gives away free goods, discounts, etc. Equity-based models give a small stake in the business, while credit-based ones offer to pay back the amount with interest. You can select the most appropriate model based on your specific needs.
- Compatible Crowdfunding platform – Selecting the correct crowdfunding platform is another important aspect of achieving your financial goal. The platform can be chosen based on the kind of business you do and your business plan. Different platforms have varied expertise and provide different types of services. For example, platforms like Barnraiser (food and agriculture), MedStartr (healthcare), AppStori (app development) cater to niche markets. Kickstarter & Indiegogo are rewards-based, while Fundable offers rewards based & equity fundraising for small businesses. Others, like SoMoLend, work like a credit-based crowdfunder.
Portico Latin Bistro & Cantina, a Latin American restaurant in Langley (near Seattle), raised $16,000 in seed money. Owner Graham Gori, a former correspondent with The New York Times and The Associated Press, was no expert in raising money. Here’s how his small-town business succeeded in its crowdfunding campaign.
Gori figured that there was a need for his kind of restaurant (ethnic food in the market). Next he mobilized his family and friends through extensive use of social media. He prepared a promotional video with help from a photographer friend. He also used old-school marketing techniques to reach out to the elderly and small communities.
Gori himself was skeptical about his chances, and he had backup plans ready. He had applied for a $15,000 loan from a local group that helps small businesses raise funds. But in the end he ran a successful crowdfunding campaign on Kickstarter, defying all odds.
Protecting Investors and Small Businesses
Currently, crowdfunding is a great tool for startups, small businesses, artists, and charities. The new law under the JOBS Act opens up the market for a large number of businesses. At the same time, it also paves the way for potential threats. Both investors and business owners need to be protected from these.
- Disclosures – Once you have investors, disclosures are inevitable. Investor accountability is of utmost importance. Though not as tough as the traditional route, companies are still required to file basic information with the SEC. This includes the description of the business, financials, the names of directors, etc. The disclosure requirements also vary, depending upon how much money you wish to raise.
- Regulations – As more and more crowdfunding platforms are being launched, checks need to be put in place. Early adopters have already launched a self-regulatory organization to act as a gatekeeper to accredited crowdfunding sites. The Crowdfunded Intermediary Regulatory Association is trying to provide investor protection.
- Uninformed Investors – It will be tough to convince this set of investors. Non-accredited investors can now participate in crowdfunding. They might jump on to the bandwagon, sensing an opportunity. But what if your investor doesn’t understand the business? This could turn out to be huge problem.
Small businesses previously dependent on traditional funding methods now have an alternate route. Sourcing funds has become much easier with the advent of crowdfunding. A concrete business plan, regular updates and solid social media presence should see you through your crowdfunding campaign. Your financing possibilities have grown manifold, so don’t hesitate! Do lots of self-promotion on social media – and fund your business!