Live Wire Reporter

Small Business Owners Increasingly Turn To Crowdfunding For Capital

Small Business Owners Increasingly Turn To Crowdfunding For Capital

While small-business lending is rising, many entrepreneurs remain ineligible for bank loans and government-guaranteed programs. Still, there are alternatives available for businesses to get money.

The most recent Small Business Administration data shows loans increased by more than 1.5 percent from the first quarter of 2014 to same quarter in 2015.

But 50 percent of small businesses didn’t receive any financing they applied for in the first half of 2014, according to the most recent Small Business Credit Survey by several Federal Reserve banks. This is up from 47 percent in the first half of 2013. (Tweet This).

For business wiling to look beyond traditional sources, crowdsourcing offers another potential capital source.

“Although small businesses make up a vital part of the economy, access to small-business loans has been restricted since 2008,” said Sean O’Malley, president and co-founder of SmartBiz, in an August interview. Banks often refuse to issue smaller loans to entrepreneurs, he added.

The average government-guaranteed loan in 2012 was nearly $338,000, but most small businesses seek loans of less than $100,000, according to the SBA.

Alternative lending platforms tend to have higher, risk-based interest rates. Lending Club’s rates range from 5 to 29 percent, Prosper Loans sets rates from approximately 6 to 36 percent and Harmoney’s rates vary from 10 to 40 percent.

There are alternatives, however. Crowdsourcing platforms allow businesses to solicit contributions from online communities, providing independence that bank loans do not.

Crowdfunding

With crowdfunding, entrepreneurs provide rewards to lenders instead of promising repayment. Perks may include copies of the company’s product, merchandise and mementos.

There are dozens of platforms that cater to crowdfunding, but Kickstarter and Indiegogo are the most popular.

Kickstarter is strictly for creative projects and has seen more than $2 billion pledged since 2009. Indiegogo, which is open for all campaign types, has raised more than $800 million since 2008.

Kickstarter and Indiegogo both have all-or-nothing campaigns: a model that motivates backers and decreases risk for creators. However, Indiegogo offers a flexible plan that allows creators to keep all funds regardless of success. Both platforms charge campaigns 5 percent of the total funds raised.

Warning: Campaign creators on both platforms are subject to legal action if they do not complete their project or fail to fulfill promised perks.

Crowdfunding may not always be suitable. Entrepreneurs seeking financing for new employees, advertising and renovations should seek other options.

Crowdlending

Crowdlending sites like Funding Circle or Lending Club are popular for peer-to-peer loans. Unlike crowdfunding, investors are repaid unless a loan defaults. These alternative platforms boast convenience, speed of turnaround and high approval rates, but often have higher interest rates than banks.

Breaking the mold is crowdlending platform Crowdadvance.com

Like Kickstarter, the site has profiles and investors can pick projects they want to support. Investorsget a great return and entrepreneurs get the capital they need to grow, usually within days of applying.

Since its inception, the platform has facilitated the funding of more than $25 million in working capital in the U.S. with plans to explore European markets soon.  The platform is currently funded by private investors but expects to entertain institutional capital in the next few months.

That’s not to say banks are out of the small-business game entirely, though.

Wells Fargo has taken strides to increase lending by extending $100 billion in small-business loans by 2018. The bank granted $22.6 billion in commitments in the first 15 months of the program. TD Bank has also been active.

“There is always this kind of sentiment out there that banks don’t lend,” Jay DesMarteau, head of small-business banking at TD Bank, told CNBC in August. “Our demand for small-business loans has been pretty consistent, and I think a lot of times the alternative lenders portray the banking market as being inefficient, not customer services friendly.”

TD Bank offers average interest rates in the mid-single digits, according to DesMarteau. Similarly, Wells Fargo extends lines of credit with rates from 5 to 13 percent.

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