Start-ups have always struggled at getting capital before launching their businesses. They have no revenue, no real prospects, no assets and no brand name. In fact all they really have is a hope and a prayer.
Thus, no lender or investor in their right mind would touch a start-up business – and they usually don’t.
But, year in and year out, some 600,000 + new businesses are started each year; according to the Small Business Administration.
These businesses have to get funding somewhere. The question becomes, where?
Each business is different and as such each may find a different or unique way to scrape together the capital needed to launch their company. Some new businesses have to either cash out all their personal resources like home equity, stocks and bonds, deplete savings accounts while some may find investors in their local area or tap their friends and family.
Whatever they do, the bottom line remains the same; small, new start-up businesses can’t get outside capital from traditional business loan resources like banks or other financial institutions.
But, over the last decade or so, there have been some really ingenious and innovative entrepreneurs stepping up to fill this lending gap.
By now you might have heard of peer-to-peer lending where members of a network borrow and lend to each other – cutting out the banks or professional investors.
And, recently there has been a renewed push for a similar form of start-up business financing, termed Crowd Funding.
With the huge popularity of social networking and the reach that this direct interaction can bring to one person’s idea, crowd funding is getting a new foothold in the business world – really picking up since 2008.
Now, crowd funding is not going to provide your new business with millions of dollars in capital like a venture capital deal would or will it provide you with hundreds of thousands of dollars like a bank loan would. But, it could (should if used right) provide your start-up business with enough initial capital to get launched and begin to generate customers and revenue – because, once your new business does start to show some promise or begins to generate actual business, other financing options will open up to it.
Think about the typical start-up business – a business that is only an idea at this point. What expenses will it really face before opening its doors?
Most new businesses have the following start-up costs:
Legal – For incorporating your business or filing for your business registration – usually around $300,
Rent / Lease – $500,
Leasehold Improvements – $600,
Office supplies and office equipment – $1,000,
Web design and marketing materials to include logo design and brochures – $550,
Utilities / Insurance – $250,
Inventory – $300.
That totals about $3,500. Moreover, for those businesses that don’t need inventory or a building to operate out of in the beginning (online businesses), their start-up costs are much lower.
Now, many new business owners end up putting this amount on their credit cards then open their doors and start to build their company. But, given our recent recession and slow recovery, you just might not have the available balance on your credit cards to do this.
In steps crowd funding: Use your social network – those people you know and those you don’t but are friends, followers or fans with – to raise that needed start-up cash.
According to VC Deal Lawyer, based on several reputable publications like the Wall Street Journal and the Economist, crowd funders can typically raise between $2,000 and $10,000.
While this amount will not let your business push a national marketing campaign with a Super Bowl ad this coming February, it should be enough to cover those initial start-up costs – allowing your new business to open its doors and begin to get after paying customers.
Further, and as another solid benefit, most crowd funders are not giving away large portions of their company like they might do with local or angel investors or even with strategic partners like CPAs and attorneys.
In fact, very few crowd funding businesses are giving away equity. Why, because it runs up against the Securities and Exchange Commission’s rules regarding equity investment in private companies (think Reg D).
Instead, these companies are providing their donors or contributors some type of perk or reward – something tied to the business after it gets up and running – like a coupon or sample or even a personal phone call from the owner.
Just image that you get a personal call from the next Mark Cuban before he becomes a household name – pretty neat!