Small businesses need working capital to grow is crowdfunding an option?
Most small businesses need working capital when they are in a growth mode.
They need to hire, market, and purchase inventory or equipment. Very few companies can self finance their expansion. When banks decline their loan requests because of low personal credit scores or the fact that the companies have not been in business long enough to qualify for institutional lending, these SMEs (small to medium enterprises) seek alternative resources. High rate pay day loans are short term and too expensive to allow for business growth.
Is crowdfunding a good option?
The May of 2016 Title III of the JOBS Act
In May of 2016 Title III of the JOBS Act went into effect, allowing small businesses the opportunity to offer equity to non accredited investors.
Prior to that date equity crowdfunding platforms could only offer equity opportunities to accredited investors. Under the new regulations that have created a larger market but less sophisticated investors, more oversight is required. The regulations are more stringent and more costly for the SMEs seeking equity investors.
For the past few years under the JOBS Act Title I many crowdfunding companies such as Kickstarter, Indiegogo and other on-line platforms have provided funding for start ups and small growing companies.
These programs are referred to as donor programs and offer small gifts and merchandise in exchange for contributions. Many of these SMEs appeal to individuals who want to support socially responsible ventures. Other platforms such as Kiva, provide microloans for start up businesses around the world.
The investors are lenders and receive a rate of return on their investments.
Prior to May 1, 2016
Prior to May 1, 2016 under Title I of the Jobs Act, crowdfunding platforms could only offer equity positions to accredited investors who are generally defined as individuals with net worth in excess of $1 million.
We hear about the successful equity campaigns, but the ratio of successful campaigns is small. In many cases the funds raised were not sufficient to move the companies into a growth mode because the initial funding request was under estimated, or in some cases, partial funding was allowed and the companies needed to find other resources to meet their capital requirements.
Next- Crowd Funding- Effective May 1, 2016