Crowd Funding - Small Business Financing

Funding a business (especially a startup) can be very harrowing - an issue that budding entrepreneurs have struggled with since the dawn of time.

Most banks and private lenders do not fund startups or small businesses without a significant track record. Even private equity is out of reach for nearly 99.9% of all businesses.

That leaves many business owners with no other choice but to bootstrap their companies by tapping family and friends, seeking personal loans or using savings and retirement accounts to fund their businesses.

However, recently, entrepreneurs have been able to tap a new source of financing for small amounts of capital (usually very small amounts) - called Crowd Funding.

 

What Is Crowd Funding?

Crowd Funding is a relative new method of raising capital. While the concept itself has been around for decades helping the likes of artists fund specific projects - like funding a movie (you might get a producer credit on the film), a concert tour for a promising band, or helping a charity in meeting its fund raising goals, it has just recently been tapped by new or growing small businesses.

- Back To Top - Search For Alternative Business Loans

How It Works:

Instead of taking your funding pitch (request) to a few large institutional or accredited investors for a large single investment or seeking a business loan from your bank with all the hassles and years of loan payments, Crowd Funding is more geared to raise small amounts of capital from your social network or from online communities - raising small amounts like $5 or $10 from hundreds or thousands of normal people who either like your idea or for a small discount on your future products or services.

To help with this method of fund raising, several new businesses have stepped up and created online platforms to assist entrepreneurs in funding their ideas or businesses.

However, each Crowd Funding platform has their own rules and requirements. Some will not let you raise funds for general use in your business or for operating capital but will allow you to use their platform to raise funds for single projects (like a new product launch) or for a new marketing campaign.

Some may require that the entire amount of your request be fully funded by the set deadline or whatever funds raised will be return to your "donors."

- Back To Top -

Average Amount Raised:

In researching how much an average crowd funding campaign can raise, we came up with a very large scale. It really depends on how your story affects possible contributors as well as how well your campaign is marketed. Just like most things in business, you get out of it what you put into it.

However, based on several reputable resources and other publications on this subject, the average amount that can be raised is between $2,000 to $10,000.

Keep in mind that this form of start-up financing is still in its infancy - as the industry grows and acceptance of this type of funding raising increases, so should the average amounts raised.

- Back To Top -

What Is Expected In Return:

Some donors or investors expect nothing in return for their investment - just taking pride in helping a worthy project or idea; while other may expect to receive periodic updates about the project or actually get involved in some of the decision making.

For example, a t-shirt company might not only allow all contributors to have a say in their shirt designs but may also receive say 50% price discounts on the shirts themselves for small donations like under $25 and larger discounts for larger investments.

Or, some funding services are akin to fan sites where your donation or investment will get you into the member only organizations and allow you to vote on project decisions or be award with redeemable points for your contributions.

- Back To Top -

Major Issue and Pitfall:

The major issues facing Crowd Funding is that businesses cannot offer equity for the contributions as any such investment for an equity stake could run afoul of the Securities and Exchange Commission's (SEC) rules - particularly under Regulation D, which, among other restrictions, limits the number of non-accredited investors or limits the total number of investors before a business is required to register and report to the SEC (a very expensive and time consuming process).

Some other online platforms have been trying to get around the SEC's rules by accepting your donation on your behalf, pooling those funds and making direct loans or investments to businesses or projects. While the online site essentially handles all the dirty work here (by-passing the SEC's rules) the "donor" could receive in return a proportional percentage of quarterly revenue or a piece of the future earning of the requestor.

- Back To Top -

New Developments on The Horizon:

Interesting enough, Rep. Darrell Issa (R-CA) just recently sent a letter to the head of the SEC asking them to consider new rules for small businesses using Crowd Funding for rising equity capital. In the letter, the Congressman asked the SEC to consider allowing small businesses the ability to raise up to $100,000 in aggregate via a maximum $100 investment per individual.

The idea here is to get the SEC to relax it regulations regarding equity invest - rules put in place to protect unsavvy investors from losing life savings to unscrupulous businesses - under the pretext that most investors (savvy or not) could stand to lose $100 and not be that much worse off.

The SEC has recently responded, not with a decision as of yet (April 18, 2011), but a seemingly favorable review. Only time will tell - but, if approved by the SEC, this would open up a plethora of funding options for all small businesses across this nation.

- Back To Top -

Costs:

While you may not be required to pay back the funds or generate a return for these so called "investments", most Crowd Funding sites will take a percentage cuts (usually around 5%) as well as require you to cover (out of your proceeds) the costs of collecting those funds like credit card processing or PayPal fees.

- Back To Top - Search For Alternative Business Loans

Copyright 2007 - 2012 - Business Money Today - All rights reserved