The economic downturn of the past several years has resulted in a severe drought in traditional small business lending, which has forced entrepreneurs and startups to think outside the box for alternative ways to generate the cash they need to survive and grow. Peer-to-peer lending, a well-used means of generating financial backing, has taken the next logical, evolutionary step into what is now known as crowdfunding. Through this funding method, a startup or existing small business makes an appeal for financial support to a large and diverse group of individuals. The amount contributed is up to those supplying the funds; it can be $5, $500, $5,000, or more. This approach has been used successfully for many years in the arts and philanthropy. Entrepreneurs and small businesses have only begun to delve into crowdfunding as a means to access the money needed to establish or expand their enterprises, or to fund a new project. If you have a small business that is primed for expansion, or you are about to take the leap into a startup and need capital funding to bring your idea to fruition, crowdfunding might provide the ideal solution.
How does Crowdfunding Differ From Peer-to-Peer Lending?
When we think of peer-to-peer lending, what immediately comes to mind are professionals within a business community or industry who actively back entrepreneurs and start-ups with financial and intellectual support; angel investors are an excellent example. A further step towards crowdfunding would be an investment club; local individuals who pool their resources and provide small loans to other local businesses to promote their survival and success. Thanks to the Internet, the relatively new methodology of crowdfunding has taken tremendous strides in a very short amount of time.Whereas peer-to-peer lending is somewhat limited in its matching abilities between entrepreneurs and investors, crowdfunding has no such limitation. A small business in the U.S. can access literally billions of potential investors around the globe, and receive contributions from any number of interested parties with ease.
Is Crowdfunding Legal?
Crowdfunding operates within the law, but entrepreneurs and small businesses are somewhat limited in how they could raise funds; they can accept "donations" from any number of individuals, in exchange for a reward or perk. In order to accept actual investment funds from would-be shareholders, a business must be a publicly traded company registered with the Securities and Exchange Commission, which in essence means that a contributor does not obtain a stake in the new business as a result of their donated funds.
This may be about to change. In November, 2011 the House of Representatives passed the Entrepreneur Access to Capital Act, and it is now waiting for Senate approval. The legislation in this new bill allows individuals to invest a maximum of 10% of their yearly income, up to $10,000, through a crowdfunding platform. The amount of equity funding an entrepreneur can raise through crowdfunding is capped at $2 million, and the company does not have register with the SEC. In effect, this will enable anyone to buy a small equity stake in a startup that may turn out be the next Microsoft. The bill has bipartisan support, and the enhanced access to financial backing it offers is viewed as a step forward towards small business development and job creation. If this law is passed, it is expected to open the investment floodgates to the benefit of both entrepreneurs and the public.
How Can a Small Business Access Crowdfunding Resources?
The availability of crowdfunding sites and sources is increasing almost daily. If, and when, the Senate passes the EAC Act, crowdfunding growth should receive another healthy boost. Right now, a small business or startup can venture into crowdfunding on their own by setting up a social media appeal, along with a means to accept funding, but it can take considerable time to get the word out to a large number of potential contributors.
Alternately, an entrepreneur can sign up with one of the growing number of professional and not-for-profit crowdfunding specialty websites that are popping up worldwide. There are sites that focus on social issues, those that promote the creative arts, and some that lend their talents and services to the for-profit entrepreneurial business and investor. Others offer equal access to anyone wishing to make the public aware of their funding effort.
How Do Crowdfunding Sites Work?
An individual or entrepreneur who is looking for growth capital signs up with a crowdfunding site and launches a fundraising campaign. Sites allow individuals or businesses to set up a page detailing their cause and their objectives, cost-free. Typically, the crowdfunding website handles public relations and the collection of donations. Funding campaigns are usually promoted on the website itself, through social media and possibly press releases, but entrepreneurs have a vested interest in spreading the word themselves, as well. Many professional crowdfunding platforms take a percentage of the total amount raised, sometimes as much as 10% of the gross donations. Usually, a campaign has a specified end date, and often, if the dollar objective hasn't been reached, all contributions are returned. If this occurs, the company or individual who sought funding has no financial obligation to the host site.
Crowdfunding may soon become the preferred method of generating seed and growth capital. It offers small businesses and entrepreneurs an innovative and unique opportunity to reach a mass audience of potential investors, and a viable alternative to get the funding necessary to jump-start a new idea or project and propel their success to the next level.
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