By Connie Sparks
How entrepreneurs and small businesses raise capital is undergoing a transformation. Several years ago when credit was more readily available, capital appeared to be accessible to many. With the economic downturn, the business financing climate drastically changed.
Small business owners and entrepreneurs began to explore non-traditional capital funding resources to start new businesses and grow existing businesses. Alternative funding options began to increase through asset-based financing, crowdfunding, and more.
Crowdfunding is an alternative funding vehicle for entrepreneurs and small businesses. It can be used to raise capital from a large group of people, some of whom may be peers. Crowdfunding can be used to support projects or inventions, launch a business, finance a proof of concept, pre-sell new products, or finance production costs for a feature film.
Financing test marketing for new products or product lines and raising working capital for raw materials or inventory are other possibilities for crowdfunding. The landscape continues to evolve daily with increased innovation among entrepreneurs and business owners who are unwilling to accept “no” when confronted with a financial barrier.
Crowdfunding has its costs. Platforms typically charge a fee of 5 percent or more of the funds raised. Billions of dollars are raised on an annual basis through crowdfunding.
Contrary to common beliefs, crowdfunding was introduced long before the 1990s. An example of this peer-to-peer funding goes back as far as 1885.
Do you know why the Statute of Liberty stands today? When the American Committee for the Statue of Liberty ran out of money for the Statue’s pedestal in 1884, Newspaper publisher Joseph Pulitzer came to the rescue with a creative solution. He wrote an article and published it in his newspaper that resulted in about 125,000 New York residents donating $1 or less to raise the money needed.
This generated $100,000 to pay for the Statute of Liberty pedestal. In thanks for the donations, each contributor’s name appeared in the newspaper. These elements are critical to modern day crowdfunding.
Crowdfunding platforms such as Gofundme, Kickstarter, Indiegogo, Kiva, and Fundable have been around since the 2000s. Here are four types of crowdfunding:
- Donations – Money is raised with no expectation of something in return. Someone wants to support the cause because they believe in it.
- Rewards – Money is raised with a reward provided to the contributor. It may take the form of an item, acknowledgement, or invitation to an event.
- Debt – Money is raised with interest being returned for use of the funds with a specified time frame for repayment.
- Equity – Money is raised with the return of ownership. Equity crowdfunding became legalized in 2012, when President Obama signed the Jumpstart Our Business Startups (JOBS) Act. This is an alternative for certain types of businesses in select industries, as there are significant compliance requirements.
Through crowdfunding, thousands of innovators have been able to raise millions of dollars for new technologies, research and development, and new products. Crowdfunding will continue to support innovators in the United States and abroad, as it removes a barrier to market entry with a viable alternative.
Crowdfunding is not for everyone, and all crowdfunding platforms are not created equal. If you are interested in exploring non-traditional capital resources, be sure to complete your research and ask for assistance where needed. Another consideration is to work with lenders who adhere to the Small Business Borrowers’ Bill of Rights, which can be found online at responsiblebusinesslending.org.
Connie Sparks is a Business Advisor with the Small Business Development Center (SBDC) hosted by College of the Canyons. Ms. Sparks’ column reflects her own views and not necessarily those of The Signal. For more information about how the SBDC can help your business, please call 661-362-5900, or visit www.cocsbdc.org.
