Crowd-funding – a new way of raising capital for small businesses – is coming. It may or may not work for your company, but it might be worth exploring. Here is what you need to know.
As a small business owner, your options for raising start-up or expansion capital have always been limited – mostly to friends and family and, sometimes, a very forward-thinking bank.
That’s because securities laws have always made it fairly difficult for small companies to approach the general public for funding. But that’s about to change. It’s starting to look like the “crowd-funding” movement is making some serious noise in the financial markets. And that could be good news for your company.
The Basics of Crowd-Funding
Crowd-funding, or crowd-sourcing, has been around for several years, but was usually used to raise charitable donations, or to fund very small start-ups or special projects in exchange for token gifts.
But starting late this year, crowd-funding can be used to sell – online – small amounts of equity (stock, or shares of ownership) in a company, to large numbers of investors with relatively few restrictions.
This is potentially helpful to your growing business because previously, smaller and early-stage companies could sell stock only to very high net worth, experienced investors. And let’s be honest – there just aren’t enough of those around to fund every worthwhile company or project.
Crowd-funding lets companies cast a “wider net” for funding, by letting them sell up to $1 million of stock per year (or $2 million, if audited financial statements are provided) to an unlimited number of investors.
The crowd-funding option will also let smaller companies avoid numerous registration requirements and filings that could easily cost more than a hundred thousand dollars in legal and underwriting fees.
Is Crowd-Funding Right for Your Company?
According to the Crowd-funding Industry Report, crowd-funding platforms raised almost $1.5 billion last year, bringing cash to more than a million separate projects. (These funds were mostly in the form of charitable donations – that will change with the new regulations that allow for investments in companies.)
Many of the details regarding how crowd sourcing will work are unclear because the government has yet to establish specific regulations.
But there are a few things to know:
Work on Your Story
Why should someone invest in your company? Would you give your money? Your company or project doesn’t need to be the next Microsoft or iPhone, but your story should be compelling, you should be able to demonstrate a legitimate market need for what you’re pitching, and it should be clear how you intend to make money.
Keep it simple, and be prepared for lots of specific questions.
Find a Platform
Finding a crowd-funding platform shouldn’t be too hard. There are at least 400 operating in the U.S.
Different platforms are catering to different types of businesses. There are platforms dedicated to tech, manufacturing, food service, and media companies. Some platforms offer extended services, like the preparation of documents for your offering, or credit card processing.
Fees vary, but tend to range from 4 to 9% of the amount raised. You can start your search at www.crowdfunding.org.
Prepare Your Documentation
Your company must be prepared to disclose how much money it intends to raise, how the funds will be used, and how the individual shares will be valued.
Not all the rules have been written, but you may have to certify the truthfulness of any financial statements provided and provide tax returns for previous years. Your crowd-funding platform will have more information on what exactly you need to provide.
The Bottom Line on Crowd-Funding
Crowd-funding can be a great opportunity for many companies.
You don’t need a team of Wall Street lawyers and a thousand stock brokers to pitch your company. You need a good story and a crowd-funding platform. Crowd-funding provides access to an almost unlimited number of potential investors with minimal fees and very little red tape.
Discover more creative methods of business growth at MP Star Financial:
- Creative Ways to Grow Your Business: Tapping Your Company’s Idle Assets
- Creative Ways to Grow Your Business: Online Advertising
- Creative Ways to Grow Your Business: Job Sharing
- Creative Ways to Grow Your Business: Make Yourself an Expert
Whether your company is early-stage or well-established, MP Star Financial’s invoice factoring services can help you get paid faster on your outstanding invoices – usually the same day! Call for more information. (800) 833-3765, extension 150.