What is Crowdfunding and How Can I Use It?

Want to expand your small business but need additional funding to do it? You can go the traditional route with a bank loan, personal funds or investor capital. But there’s a new alternative called crowdfunding. It’s a way to solicit small amounts of money from a large number of people (or a crowd), usually using the Web. Here are some important facts about crowdfunding and how it can be used for small businesses.

The Small Business Administration offers a 30-minute online class to help you learn more about this new funding source. Here are some important highlights to give you a head start:

  • The program was created from the Jumpstart our Business Start-Ups Act that allows participants to raise up to $1 million a year without having to do a public offering requiring state-by-state filing. The SEC is currently writing regulations, so the financial disclosure and legal requirements are not yet final. Here’s a link to the proposed rules.
  • It’s attractive to investors since only a small contribution is needed toward an online funding target. No money is exchanged until the target is met. In return, they receive a small stake in the business idea.
  • Like other funding sources, you need a solid business plan with accompanying financials in order to attract contributors.
  • There are several existing website platforms that can be used to solicit funds. Typically, they charge a fee to help match investors to potential opportunities. You can search for these websites on your favorite search engine. Use “crowdfunding small business” as your search term.
  • Advantages to consider: creates a network of supporters that raises awareness of your business and builds your brand, provides a method to test a new product or service.
  • Disadvantages to consider: may require incorporation, the potential cost to comply with proposed rules, public disclosure of your new idea may expose it to copycats.

While still in its early stages, crowdfunding may be a trend worth monitoring. It could provide an opportunity for small businesses to test a new idea or to grow an existing enterprise.

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