Many banks and investors tightened their requirements for lending and investments in 2008, due to the worldwide effects of the recession. The lack of funding available for new business ideas and start-ups left a big gap in the market. One form of funding gained a lot of support, in the form of crowdfunding.
There are 3 main models of crowdfunding:
The donation model is the most popular form of crowdfunding at the moment. Some businesses only lend the money from a crowdfunding campaign. The equity model is occasionally used in some countries, but is currently illegal as a form of crowdfunding in the U.S.
How Business Crowdfunding Works
- Create online profile. Clearly define the scope and aim of the project and submit the funding goal.
- Inspect deal terms and documents. The crowdfunding team should conduct a full background check to make sure all bases have been covered.
- Campaign is approved. With all the details agreed and finalized, visitors can view the company’s proposal, ask questions and participate in the funding process.
- Funding goal reached. If the funding goal is reached, the money would be transferred to the company and the work begins.
One often heard argument against crowdfunding is the potential of fraud and scams. Since in most crowdfunded campaigns, the company would have no obligations to the funders, if things didn’t work out. However, up until now this concern has not proved to be a problem.
Hundreds of millions of dollars have been raised in funding for thousands of different businesses and there have been no cases of fraud. Crowdfunding only works because there has to be a certain level of trust from the people who fund a project towards the company.
State of small businesses in the U.S. economy
In the U.S. about 65% of all jobs created come from small businesses. In addition, half the GDP is produced by small businesses. But in contrast, only a mere 17% of small businesses receive financing. This is usually through bank loans, angel investors and venture capitalists. Crowdfunding is potentially set to be the go to source of financing for small businesses.
According to Amy Cortese (author of Locavesting), “If Americans shifted 1% of the 30 Trillion dollars they hold in long-term investments to small businesses, it would amount to more than 10 times the venture capital invested in all of 2011.”
The future of Business Crowdfunding
The future looks very bright for crowdfunding. On 5th of April 2012, President Obama signed the crowdfunding act into law. The regulations for the equity model have yet to be set, but it’s only a matter of time before it is approved. The next few years will define the long-term effects of crowdfunding on small businesses and the economy.