Small Business Drives Economic Growth
Despite being the strongest drivers of growth in the U.S. economy, small businesses face immense challenges garnering funding from traditional sources like venture capital firms, angel investor groups, or debt financing. 90 percent of small business owners still believe that banks are the first stop for business financing, despite more than a 30-year history of banks decreasing the number of their loans going to small businesses.Since small businesses aren’t the only ones struggling for financing – startups, entertainment projects, musicians, and others face similar challenges – the new (and popular) crowdfunding industry has increasingly filled the funding gap. The two types of crowdfunding we will focus on will be rewards and Title III equity crowdfunding.
Traditional Lenders Overlook Small Business
New business owners usually aren’t the best candidates for small-business traditional loans from banks or other funders, which typically require collateral, years of successful operation and excellent personal credit. Even if funding were approved, new entrepreneurs may not have the resources to begin making loan payments immediately. Rewards-based crowdfunding is an alternative to traditional small-business financing and provides the means to transform promising ideas into a profitable reality — without having to pay back a penny.
The Crowdfunding Model Works Well For Small Business
Small businesses that have a loyal customer base or large following can investigate the newly passed Regulation Crowdfunding. This new form of equity crowdfunding — which is the result of the new Title III of the JOBS Act — allows companies to raise up to $1,000,000 each year, from investors for their businesses, using crowdfunding platforms. You agree to sell stock in your business and can offer those shares to anyone. However, there are limits on what individuals can invest based on their income. The transactions are done through Web-based platforms — which will both help keep you compliant with all of the laws and rules and will also take a commission on the sale of the stock.
Regulation CF is Perfect for Small Businesses
This form of capital raising is especially attractive to “main street” businesses — which may have a great history and engaged customers, but find that banks aren’t willing, or able to lend to them. This model exists in many other countries, and we see local food-based businesses, bars and pubs, art and creative studios and other product based companies taking advantage of these models and raising on average about $700,000.
Crowdfunding Can Be A Catalytic Funding Event
Equity crowdfunding can supply needed capital for equipment, growth capital or for strategic hires. In many cases, it becomes the onramp to other more traditional models of financing as a catalytic event. Some savvy small business owners have learned to leverage small early-stage investments through crowdfunding to increase their bargaining power and get more money from venture capitalists or other later. Whether a tool to provide small funds to launch a startup or as an alternative to the high costs of IPOs, these new rules expand the financing options available to startups and small businesses across the USA.