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The Case for Crowdfunding for Small Businesses

Starting a business can be tough going, but consistently growing it over time may prove even more difficult. For both startup costs and ongoing capital needs, crowdfunding has become a legitimate supplement to more traditional sources of small business financing.

What is crowdfunding?

Although the concept of raising small amounts of money from many sources isn’t new, online crowdfunding is a relatively new method of fundraising. Synonymous with sites like Kickstarter, GoFundMe, and IndieGogo, crowdfunding refers to online platforms that allow anyone to contribute small or substantial amounts of money to support a new product, service, or mission of some kind.

Although first used to facilitate donations for charitable causes or to help a family member with emergency medical bills, lately crowdfunding exploded into an entirely new model of business financing. With support from new SEC regulations, crowdfunding campaigns established by corporate interests may now work as private equity sales, debt offerings, and more.

For its own reporting purposes, the SBA classifies small business crowdfunding platforms within the category of “marketplace lending” to separate it from traditional sources of funding, like bank loans. It estimated that in 2014, $8.6 billion worth of business loans were financed through marketplace-lending services, including crowdfunding platforms. Since then, crowdfunding has earned a place within the lexicon of many small business owners and entrepreneurs.

Does crowdfunding work as a source of capital?

Recent data on crowdfunding from PricewaterhouseCoopers estimates that people contributed more than $850 million using these platforms to finance various businesses in 2017. These contributions were not tied to equity or debt obligations, and the average amount pledged per person, per campaign was less than $100.

Since it’s so new, it’s unclear how much money small businesses are earning from crowdfunding campaigns. Still, it stands to reason that more companies will tap into this market as it proves itself more viable. However, it’s unlikely that crowdfunding will replace the most significant, traditional sources of small business capital, such as bank loans, SBA loans, and personal savings.

A 2016 report from the SBA found that while a successful crowdfunding campaign tended to exert a positive influence on a company’s ability to secure additional capital moving forward, this effect diminished by the time more than $75,000 was raised. In addition, this research did not include equity- or debt-based crowdfunding. Therefore, the SBA and others urge business owners to consider crowdfunding as an early option, but to remember this solution may not scale appropriately as the business’s financial demands grow.

Avoid financing missteps

Crowdfunding may be just the thing for your business right now, but it’s important to consider this trending source of funding in the greater landscape of your business plans now and in the future. A business-focused banker can help you navigate funding options, timing, tax implications, and other considerations specific to your business.

The specialized business experts at First Business Bank help all types of businesses, including startups that have leveraged crowdfunding to their advantage. With this road-tested knowledge of what works and what doesn’t, we help you evaluate your options and strive to build a long-term relationship with you.

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