Monthly Archives: July 2017

Crowdfunding Takes Off for Small Businesses

It’s been a four full months since the Title III equity crowdfunding provision of the Jumpstart Our Businesses (JOBS) Act went into effect, allowing small businesses and startups to raise up to $1 million annually in crowdfunded securities investments from both accredited and nonaccredited investors. As of Sept. 15, businesses had raised more than $7 million in capital investments using Title III.

Although Title III is a particularly young section of the JOBS Act, it’s been hailed as a potential game changer for small-scale financing. Whether a company’s projected growth is too flat to interest venture capitalists or an owner simply doesn’t want to end up beholden to one highly powerful investor, Title III is seen as a way to raise growth capital without sacrificing independence. Moreover, campaigns can be targeted at locals within a business’s community, helping to build a loyal customer base that maintains a stake in the company’s success. [See Related Story: Title III Crowdfunding Ruling Changes Startup Fundraising for Good]

“I think Title III will change financing. If you look at how the industry evolved in Great Britain when they did it, we’re already growing faster than they were,” Mike Norman, CEO of equity crowdfunding platform WeFunder, said. “It will take a little time, as any new securities legislation does. Awareness is the biggest challenge right now. A true test and the most compelling part is that we now have companies that have raised meaningful funds from investors. How can they activate those investors in terms of promotion and customer loyalty?”

WeFunder has tracked the growth of the equity crowdfunding industry so far, and the early statistics appear promising. More than 9,000 investors have contributed $7.14 million so far, helping to fund 29 successful offerings, three of which raised the full allotted amount of $1 million in capital. In just the past seven days, investors from the crowd have contributed $112,068 to small businesses.

For companies like stock-photography gallery Snapwire, which crowdsources made-to-order photos from over 300,000 photographers worldwide, leveraging the power of an already-engaged community led the company to immense success in its Title III equity crowdfunding campaign. In 72 hours, Snapwire had eclipsed its fundraising goal. Now, the company holds about 280 percent of its goal in investments.

“The very truthful reason we got into equity crowdfunding is that we struggled to raise capital from traditional [venture capitalists],” Chad Newell, CEO of Snapwire, told Business News Daily. “We were such a leader in doing this — nobody had run a successful campaign yet at the time. I had little expectations other than a fair degree of confidence that we’d be successful.”

Lending Right for Your Business

So, your company needs money that you currently don’t have. Maybe your business is just taking flight and is still lacking the necessary funds, or perhaps you have high aspirations with low profits at the moment.

If loans are your go-to choice for financing, you’ll need to decide between a traditional bank loan and an alternative lender. For the latter, peer-to-peer (P2P) lending might be a smart option if you’re looking for a smoother, faster borrowing process.

According to Investopedia, P2P lending lets individuals borrow and lend money without an official financial institution as the intermediary. Lenders collect income from interest, usually at a higher cost than with traditional loans, while borrowers access financing they may not have been approved for elsewhere.

“P2P loans can often offer higher approval rates and competitive interest rates — a stellar combination,” said Emily Bartz, a writer at NextAdvisor.com, which provides independent research and comparison tools for financial, tech and business products. “The beauty of P2P lending is that it offers borrowers a more personal experience by avoiding big banks and financial institutions. Plus, borrowers can rest easy knowing that their lender is accredited and provides legitimate loan support.”

Another upside, according to Bartz, is that P2P lending is flexible, allowing borrowers to complete the process in pieces. [See Related Story: A Guide to Choosing the Right Small Business Loan]

 

Is P2P right for you?

So how can you determine if P2P lending is right for your business? Be sure to ask yourself these questions:

 

Is it legal in your state?

Not all states allow P2P lending. However, it may depend on the platform you use. For example, according to LendingMemo, 49 states provide funding through LendingClub, while only 47 do so through Prosper.

“Potential borrowers should make sure that P2P lending is legal in their state, as it is prohibited in some areas,” Bartz said. “You can usually find this information fairly easily on the lender’s website or by completing a quick Google search,” she noted.

Before committing to the idea, research which sites are accessible in your state.

 

How quickly do you need the loan?

One potential downside of P2P lending is that it might take longer than a traditional loan, thus hurting any immediate transactions or aspirations, Bartz said.

Bartz said that “if you are in a time crunch, P2P lending might not be ideal.” Make certain that your company’s needs are in tune with the time frame of your lending process before settling, she advised.

 

Is your financial standing good enough?

Bartz noted that it’s important to consider costs such as interest rates and origination fees. While not all P2P lenders require this, it’s smart to determine whether your credit score is high enough, and your business makes enough money, for you to be approved.

“It’s crucial that all potential borrowers have a clear understanding of exactly what they’ll be paying and have a plan to keep their payments consistent and on time,” she told Business News Daily.

Choose Your Words Closely

It’s not what you say, but how you say it that could determine how successful your crowdfunding campaign is, new research finds.

A study from researchers at the University of Illinois at Chicagorevealed that linguistic style, which is how one speaks, is critically important in crowdfunding campaigns, especially for social entrepreneurs.

The study’s authors found that how a pitch is voiced and worded is much more important for social entrepreneurs than it is for their commercial counterparts.

“Here, we show that the persuasiveness of entrepreneurs’ stylistic expressions is dependent on their category membership – that is, whether they are social or commercial entrepreneurs,” said Annaleena Parhankangas, the study’s lead author and an assistant professor at the University of Illinois Chicago in a statement.

For the study, researchers analyzed 656 Kickstarter campaigns between 2013 and 2014. They discovered that linguistic styles that made the campaigns and their founders more understandable and relatable to potential funders boosted the exposure and success of social campaigns. However, linguistic style made little impact for commercial endeavors. [Raising moneyv ia crowdfunding? 15 way to increase your chances for success]

“Early-stage entrepreneurs are increasingly involved in the theatrical pitching of their projects to various audiences at forums, such as accelerator demo days, pitch mixers, competitions and online crowdfunding sites,” Parhankangas said. “How they deliver the message matters – and, as a result, it is important to study how entrepreneurs’ language use affects their chances of raising funding.”

The study was co-authored by Maija Renko, a UIC associate professor of entrepreneurship.

The researchers said style doesn’t matter as much for commercial entrepreneurs. Instead, content is likely to be enough to persuade their audience to invest.

Great Ways to Use It for Growth

Unless you’ve aggressively saved money to bootstrap your business, you’ll likely need to borrow money at some point to make ends meet, whether it’s a formal loan through a bank or online lender or an informal one from family and friends.

Regardless of the amount or source of your loan, it can be tempting to make those big “nice to have” purchases when the money hits your bank account. However, it’s important to plan your spending carefully and allocate borrowed funds toward expenses that will ultimately accelerate your business’s growth.

We spoke with small business lending experts about smart ways to put business capital to work.

 

1. Equipment and operational costs

When you’re just starting out, you may not necessarily have the funds for all the basic elements your business needs to function. Jay DesMarteau, head of commercial bank specialty segments at TD Bank, said early-stage businesses will often use their funds for operational necessities such as buying inventory and building products.

“We are also seeing higher demand for lines of credit, which typically are used to finance short-term needs, such as buying or leasing equipment, purchasing a company vehicle or injecting cash into the business during a lean period, especially seasonal businesses,” DesMarteau added.

 

2. Payroll and hiring

A company is only as strong as the people behind it, and investing your new loan funds in hiring can be a great way to help your business grow.

“True growth means spending funds to add employees who can take over some tasks such as bookkeeping or ordering supplies and help support the daily functions,” said DesMarteau. “This will allow the business owner to better focus on long-term strategy and driving profitable revenue growth.”

Isaac Rodriguez, CEO of Provident Loan Society, notes that as a not-for-profit collateral lender, most of his organization’s loans are made for short-term expenses such as meeting payroll.

 

3. Soft costs

“Soft” costs, as opposed to “hard” physical assets or products, are those expenses that don’t directly help create a product or provide a service but are necessary to keep your business functioning. This includes things like licenses, marketing campaigns and professional fees, said Rodriguez. This could also cover fees for advisors like CPAs, attorneys and bankers.

“Maximize the use of capital,” Rodriguez told Business News Daily. “For example, don’t just pay legal fees and get tax returns done – explore how those professionals can help grow your business through referrals, recommendations, introductions, etc.”