Making it in GR: How the digital community is supporting small business

The 2016 Small Business Credit Survey, published by the Federal Reserve Bank of New York, reports that startups are more likely than their mature counterparts to be undergoing growth and planning to add jobs. The report shows 70 percent of startup applicants are in need of funding to support this growth, versus 60 percent of mature applicants. Additionally, in 2016, 52 percent of startups applied for financing.

Despite the prospect of internal growth and job creation, one of the biggest challenges for startups and small businesses is accessing capital. The Credit Survey highlights that only “31 percent of startup applicants were approved for the full amount of financing sought”. In the past, tapping into personal funds or utilizing personal connections may have been the next best option if traditional bank funding was not feasible. Published in June 2017, the Small Business Administration’s Small Business Lending in the United States 2014-2015 report shows small businesses are becoming more reliant on non-traditional capital sources.

With the emergence of non-traditional financing options, small business owners now have alternatives to traditional bank financing or micro-lending programs. Looking beyond even family and friends, accessing capital has scaled. Options now connect individuals within a community or around the globe. Non-traditional funding includes: various crowdfunding options and the utilization of impact investing funds. Each offers their own unique opportunities and pros and cons to potential recipients.

Reward crowdfunding

Crowdfunding allows entrepreneurs to share their business idea—or existing business—with the masses in hopes of receiving funding. In return for the funds received, contributors receive a reward, as is typical of platforms such as Kickstarter and Indiegogo. Platforms may be focused on specific industries, such as the arts, or the stage of the business. Some platforms like GoFundMe are free, while others assess fees. Utilizing this option allows entrepreneurs to gain exposure, validate their concept or business model and secure much needed capital.

Though it is not as simple as creating a project and watching the funds pour in, with a strong product and well-executed campaign, crowdfunding can be lucrative. According to their website, Kickstarter has a community of over 14M backers, or supporters, which have funded over 136,000 projects. Recent data shows the amount being raised through crowdfunding is steadily increasing as well. According to Statista, on average, each campaign raised $32,393 in 2016, up from $19,530 in 2014. Both GoFundMe and Indiegogo report raising over $1B in funding on their websites.

Debt crowdfunding: Peer-to-Peer lending

Lending Tree was a revolutionary option for individuals to secure financing when they simply wanted to compare options or if they may not have been bankable. Now business owners have similar options. Peer-to-peer lending platforms connect businesses in need of capital with individuals looking to help. These platforms tend to be best suited for more established businesses in need of higher amounts. Though businesses may be requesting a substantial amount of capital, similar to reward crowdfunding, individuals are not responsible for providing the full amount on their own. Kiva, for example, allows lenders to contribute small amounts, sometimes as little as $25, to help fund requests.

From the business owner’s perspective, unlike rewards crowdfunding, in this case, funds must be repaid. As of October 2017, Kiva reports funding over 1M loans resulting in $1 billion being lent. For businesses not looking to take on debt, there may be another crowdfunding option.

Equity crowdfunding

Even venture capital and angel investing has gone digital. Historically, inventors needed to meet the Security and Exchange Commission’s (SEC) requirements to qualify as accredited to be eligible for certain types of investments. Crowdfunding has changed this. “Under rules adopted by the SEC in 2015, the general public now has the opportunity to participate in the early capital raising activities of startup and early-stage companies and businesses by way of crowdfunding," their website states. Though the barrier to entry has been removed, there are limitations on the amount of investing one can do annually.

Now, instead of searching for affluent individuals looking to invest in a business, entrepreneurs can turn to sites like MicroVentures. MicroVentures is a public, online venture capital investment bank. Investors have the opportunity to invest as little as $100, which opens up the market to a much larger pool of potential investors. This option is best suited for established companies with strong historical performance and larger financial needs. With equity crowdfunding, companies provide a stake in their business in return for the capital. Since their launch in 2011, MicroVentures reports facilitating over 160 investments, resulting in over $100M in capital investment to date.

For businesses that focus on their social impact and are having a positive impact on their community, there may be another opportunity.

Impact investment funds

One lesser known opportunity lies in impact investing funds. The Global Impact Investing Network defines impact investing as “investments made into companies, organizations and funds with the intention to generate social and environmental impact alongside a financial return”. These can also be geared towards specific industries or geographic areas. The Impact America Fund, for example, is focused on helping entrepreneurs in underserved and disenfranchised communities within the tech space.

The Boston Impact Initiative puts a unique spin on impact investing through an integrated capital model. To better assist their entrepreneurs and meet them where they are, the Boston Impact Initiative’s integrated capital solutions include: equity investments, crowdfunding, grants, loans, direct public offerings and more. Through these offerings, they have assisted companies scale, create jobs, and enhance the local community.

Impact investment funds can be found locally as well. Focused on supporting U.S.-based businesses in education, urban revitalization, food systems & environment and health, the University of Michigan Social Venture Fund (SvF) is the country’s first student-led impact investing fund. Since their launch in 2009, SvF has invested over $250k in businesses throughout the country.

Despite the on-going need for capital within this segment of the business market, the options to meet the demand are growing. As it becomes easier for individuals to venture into investing and the online capital resources expand, it will continue to change the lending climate for small business owners. Whether entrepreneurs are looking next door or at the digital community, there is ever advancing support for small businesses.

Leandra Nisbet, Owner of Stingray Advisory Group LLC and Co-Owner of Gold Leaf Designs LLC, has over 12 years of experience in leadership, sales & marketing and graphic design. Through these organizations, she assists businesses with creating strategies for growth and sustainability through: strategic planning, marketing concept development/implementation, risk management solutions and financial organization. She is actively involved in the community, sitting on several Boards and committees. Contact Leandra Nisbet by email at [email protected].