Small businesses keep California humming. They make up an impressive 99.2 percent of California’s employers and employ more than 6 million Californians. But small businesses can’t thrive and grow – or even get off the ground – if they can’t access loans or credit.
Unfortunately, access to capital has become a real problem for small business owners, with big banks only approving two out of 10 small business loan requests. The recession placed a chokehold on funding from banks, leading many institutions to reduce or eliminate loans valued below $250,000. This change hit small businesses particularly hard, as 68 percent of small businesses seek loans of $250,000 or less. Plus, other banks simply won’t lend to businesses with annual revenues of less than $2 million. Given these statistics, it’s no surprise that Small Business Majority’s polling found 90 percent of small business owners identify access to capital as a top concern.
Entrepreneurs are known for their creativity and resilience, though, and they’ve turned to new technologies to tackle the access to capital problem. One of the most popular new funding options for small businesses is crowdfunding, which allows businesses to solicit online donations from supporters through websites like Kickstarter and IndieGoGo.
In a typical crowdfunding campaign, business owners launch online campaigns that pitch their ideas, detail the amount of money they’re seeking and explain why they need the money. Usually, campaigns also offer rewards to supporters who contribute, like early access to products, discounts or other perks.
Jason Poole is one of several Sacramento-area small business owners who have turned to crowdfunding. In 2013, he raised more than $14,000, which helped him get his pickling company Preservation & Co. off the ground. When he decided he wanted to expand, he launched a second crowdfunding campaign and secured an additional $22,000. These funds allowed Poole to open a 3,200-square-foot retail store and production warehouse. Now, more than 400 locations sell or serve Preservation & Co.’s products, and its retail storefront is packed with items like pickled vegetables and an original Bloody Mary mix.
The advantages of crowdfunding for small businesses are significant. Crowdfunding platforms remove much of the red tape associated with bank loans and provide a flexible option, offering room for every business niche and financial situation.
Crowdfunding also offers substantial marketing benefits. At their heart, crowdfunding campaigns are as much about promoting a business idea as they are about securing financing.
“For me, crowdfunding wasn’t just about securing capital,” said Poole. “I reached 238 people through the campaign, which meant 238 people learned about and tried my product. Without crowdfunding, that level of marketing reach would be extremely costly.”
While many small businesses have successfully used crowdfunding, its potential has only just begun to be tapped – particularly in the realm of investment crowdfunding. Instead of offering product discounts or other similar rewards, as is most common for crowdfunding, investment crowdfunding offers campaign backers direct financial returns. These returns typically take the form of equity shares, interest payments on a loan or a share of revenues.
Until recently, only accredited investors – defined by the U.S. Securities and Exchange Commission (SEC) as individuals with earned income of more than $200,000 or a net worth of more than $1 million – could participate in investment funding. But the SEC changed that by finalizing rules for Title III of the Jumpstart Our Business Startups Act in late October, allowing the average American to participate in investment crowdfunding. This change promises to expand crowdfunding opportunities.
Crowdfunding is a necessary new tool for entrepreneurship. It’s opening doors and providing options to small business owners. To learn more about crowdfunding and other access to capital options and resources for small business owners, you can visit: http://www.sbmbizportal.com/.