Crowdfunding has helped over a million small businesses raise over 10 billion dollars and is transforming the way businesses find the capital needed to grow and scale. The world of crowdfunding is ever changing, so we put together a beginner’s guide to orient entrepreneurs and small business owners that think crowdfunding might be the right route for their business.
There are three general offerings and variations that are common when companies choose equity crowdfunding as their strategy to raise capital.
Equity crowdfunding does not mean you can only issue equity. Companies may offer a loan with attractive terms to investors. The good news with a loan is that issuers are not selling ownership (equity) in their company. The bad news with a loan is that the issuer must pay it back whether they’re doing well or not. Cash flow must be sufficient to make the monthly loan payments which makes these types of loans very similar to what a business might expect from a bank.
As entrepreneurs and small business owners, we start off by funding our business with what little cash we have or go to friends and family with tin cup in hand to gather up enough capital to get going. At some point, typically sooner than later, we need more cash but Uncle Louie and Aunt Betty have stopped returning our phone calls. It’s time to start exploring other options.
Our first thought is a bank loan. After all, isn’t that what banks do - lend money? Not so fast, Mr. Buffett. We quickly learn the hard way that getting a bank loan is not as easy as their small business-friendly ads make us believe. It’s hard to find data on how often banks reject business loan applications but here’s a link to a somewhat credible source. It says that big banks approve roughly 25% of the loans they consider. Small banks approve just under 50% of their applications. However, this data reflects approval rates of applications that make it to the committees that approve or reject loans. It does not include statistics on most of applications that never make it past the loan officer – and that’s a big number!
The North Carolina PACES Act was signed into law on July 22, 2016 and became effective April 1, 2017, making it possible for startups and small business owners to raise up to $2,000,000 through equity crowdfunding. This new financing option was designed to foster the support of North Carolina companies by North Carolina investors. While the text of the law itself is only 7 pages long, the rules and regulations written for compliant execution encompasses more than 27 pages. Prior to embarking on an equity fundraising campaign, it is important that you become familiar with these rules. For a small business owner that spends most of his time running his business, this can be a daunting task.
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