Crowdfunding is a term used for business funding meaning exactly what it sounds like: funding your business through a large number of people. The word has been adopted to mean different things, depending on the industry. To save confusion, however, we’ll stick to its meaning strictly for new businesses and startup funding.

Crowdfunding is mostly done online, makes this specific form of funding a newer development. We’ll start by going through models. 

Pledge-Type Crowdfunding

Kickstarter, perhaps the most well known, is a site that rewards people for “donating” to your business. If you’re selling a product, usually you’ll promise that product to your customers. If your selling something less-tangible – like a dating app or a service – companies will usually promise funders some sort of “swag” or benefits. Whether it be t-shirts or branded koozies, those who give you money often expect something in return, the same way an investor or venture capitalist would, but on a smaller scale. In order to raise funds on Kickstarter, you MUST deliver something to your funders, and you MUST meet your goal, or else you don’t get any of the cash you raise.

Other crowdfunding sites, like Indiegogo, don’t require you to give swag or meet your goal in order to cash out. This can be good for a content creator, but for an actual business, sometimes providing an incentive (like a product) motivates people to give you money. However, these options can be more convenient and cheaper than a Kickstarter campaign, and if you already have a grassroots supporting, they’re likely to get help with funding.

Equity Crowdfunding

The most recent development in crowdfunding is called equity crowdfunding, and it’s similar to an actual investment-model of funding. Through it, accredited and non-accredited individuals/investors can invest small amounts in your company in exchange for equity, or small bits of ownership. This is especially popular for hyper-local efforts, like breweries or coffee shops. It gives community members a way to invest in their community and its well-being. 

After the recession in 2008, the government realized the new businesses were being virtually wiped out by their inability to get credit and funding. So in 2012, they passed the JOBS Act, which allowed non-accredited investors to legally invest in private companies. Non-accredited investors are individuals who have a net worth of less than $ 1 million OR who earn less than $200,000 annually. That’s it. So now, pretty much anyone who wants to invest in a business through equity crowdfunding is able to.

In 2015, the government furthered equity crowdfunding de-regulation by allowing businesses to raise up to $1,070,000 per year and required that all transactions be done through an SEC-registered intermediary, either a broker-dealer or a funding portal (like a website). 

With equity crowdfunding, there are a few things you should be aware of. First, state laws regulate it. Depending on where you are in the country, the amount of money and types of investors could be significantly different. For example, in North Carolina, the 2017 PACES Act extends the amount of money that can be received from crowdfunding to $2 million and specifically allows for a non-accredited investor to give up to $5,000 per year via equity crowdfunding.

These regulations vary widely by state, so it’s important you be aware of the rules for your state before you decide to do an equity crowdfunding campaign. Like pledge crowdfunding, these are also done through online portals.

What Are the Risks of Crowdfunding?

Pledge-model crowdfunding runs a greater risk of failure than say, venture capital. Most sites often don’t require that the business have a solid business plan, and that can run the risk of fraud ruining the reputation of websites (like GoFundMe, for example).

There’s also no real advising available when you sign up for Kickstarter or Indiegogo, which doesn’t really set entrepreneurs up for success.  VCs and angel funds usually provide council. However, equity platforms authorized by the state you reside in often have more realistic models of setting up business owners for success. For a fee, you get counsel when you sign up for the platform. You also often have to provide a solid, fool-proof business plan. This way, there’s less room for error, and your company has a better chance of success.

With crowdfunding, there’s always going to be the chance you don’t get the money you need. Like rallying investors, it’s a hard process and can take ages. If you’re in need of more immediate, tangible funding, you might want to look into business loans or lines of credit. If that’s the case, FaaSfunds is here to help. Reach out to us today to get matched with the lender and loan that’s best for your business, and to receive professional financial advice.

What are the important things to think about when getting funding from friends and family? Number, one: always keep it formal.

That’s Business

Every business sector has its flaws, and finance is no exception. There’s always a catch when you’re dealing with money, and at FaaSfunds, we’re here to make sure it’s not a Catch-22. With so much to understand and be careful of dealing with business funding, we’ve made a guide to help you make smart financial decisions.

There will never be free money. Even if you apply for grants or seek investments from angel funds, there’s always going to be requirements and paybacks that not everyone can meet. Loans aren’t free money, either, and there are several things you should be aware of before you apply. Since money is a business itself, lenders are out to make a profit off of your debt, so it’s good to be aware of their practices.

According to Harvard Business School, small businesses are the driving force of American job creation. In the 15 years leading up to the 2010 census, small and new firms were responsible for creating two out of every three new jobs. Small businesses are obviously vital to the American economy, so why is having one so hard? In order to have a successful small business, it’s important to understand every aspect of your finances and maintain your debt. Here, we’ll explain the good and bad sides to maintaining business finances and getting funding.

Business Debt

Debt isn’t technically a bad thing, as long as you know how to use it. According to the Federal Reserves Small Busines Credit Report for 2018, 70% of businesses have outstanding debt. But the thing is, lenders are going to let you acquire new debt if they trust you to pay them back, and the only way to do that is to have a proven track record or repayment.  

The Bad News

According to Steve Goodrich, managing partner of North End Financial, in an article for Fundera, the single best predictor for paying off debt is the number of years a company has been in business. Roughly 50% of companies survive past the five-year mark, and if they can make it past that, it’s a pretty good indicator that they’ll succeed in the long run. After that five year mark, it’s significantly easier to get funding. 

But what about in the meantime? That’s the catch with getting a business loan – if you’re a new business and don’t have a track record yet, it’s a lot harder to get a loan. The odds are seemingly stacked because already established businesses that turn a profit are usually the only ones likely to get funding. Startups are hard to get business funding because there’s no way to evaluate them.

This is where personal credit comes in. Often, when a business is just starting, owners and founders have to get funding based on their personal credit score. This can be good and bad. If you’re just starting a business, it’s a good idea to try and build up your personal credit first.

The Good News

The good thing about trying to find business funding as a new business is that there are options, albeit they’re rarer. How does any business get started, then, if it’s so hard? The answer lies in raising capital. For more technology/online-based, scalable businesses, they’ll often go to venture capitalists and investment funds. For more concrete, community-based businesses, options can be more limited.

Grants are hard to acquire, but finding investors can be a little easier if you have a solid business plan. There are sites specific for pledge crowdfunding (Kickstarter, Indiegogo), and even newer sites popping up for something called equity crowdfunding – where accredited (and according to some state laws, non-accredited) investors can give money to companies and instead of receiving a product or swag, they receive a stake in the business.

There are also loans structured specifically for startups. The Small Business Administration has a microloan program, which gives small loan amounts to budding businesses at very reasonable rates.

If you’re looking for a traditional loan, or feel it would work best, people were the least dissatisfied in 2018 getting financing from a small bank, according to the Federal Reserve. Of those who got small bank loans last year, only 46% reported facing challenges, as opposed to 53% with large bank loans, and 63% with online lenders. 

Within those numbers, however, the reasons for being dissatisfied varied. The most cited issues with small banks were their waiting times for approval and funding, and the most cited issue with online lenders were their high-interest rates and unfavorable repayment terms. 

But then there’s the logistics of getting business funding, like how much of a credit risk your business is. Small banks only approve 47% of those considered “high credit risk,” as opposed to 76% for online lenders.

These are all the things you’ll have to take into account when trying to get business funding. If you have bad or little business credit, an online lender might be your best option, even though they have higher interest rates.

Do Lenders Want You To Succeed? 

The world of finance isn’t really structured to help small businesses succeed. It’s more or less structured to keep big businesses successful. Just remember, lending is a business too. If you can’t pay or keep up with their terms, they’ll do whatever they can to get money from you. If you’re starting a new business, there are some things you should keep in mind that will not only set you up for success but also help you make a case to get funded. 

Tech market intelligence platform CB Insights compiled a list of the top reasons that startup businesses don’t make it. At the top of the list was a lack of market need – of the failed businesses included in the research, 42% of them failed because they didn’t fill a market void, or there wasn’t a demand for their product. It’s important to analyze the market you’re looking to enter – whether it be a tech market or a retail market – to make sure that there’s an actual need for your product. You wouldn’t make a lemonade stand in the middle of the winter in Minnesota, would you?

The next most popular reason businesses fail, unsurprisingly, was running out of cash. 29% of failed startups cited this as the reason they didn’t make it. Next came not having the right team, getting outcompeted, and then finally, pricing and cost issues. Most businesses surveyed were within tech-related fields, but even if you’re not a tech startup, there are valuable lessons to be learned from the failure of other businesses.

So What Does All This Mean?

When you want to get your business funded, there are a lot of obstacles you’ll have to face. That’s the ugly side of business financing – it’s like a game of blackjack, and you have to play your cards right in order to guarantee you’ll come out of it successfully. Some of it is luck, and a lot of it is skill.

If you want help, though, that’s why FaaSfunds is here. If you’re starting a business and want to build your business credit, or you’re looking for funding options, or you’ve been around for a while and want to know what your next move should be – FaaSfunds is your go-to business finance tracker and funding advisor. We’ll match you up with the funding that best fits your business, no matter your credit score or financial history. If you want to know what FaaSfunds can do for you, click the button below to get started today.