Crowdfunding: The Answer to Funding a Small Business?

Money is always a concern when building your business or when you’re looking to keep it in the black. Crowdfunding is defined as the “practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.” But is it the answer to helping your small business?

For a select few, it could be.  Rather than having to look to banks or private investors to get the capital needed to support your company, crowdfunding opens up your capital-seeking channels to include everyone and anyone. With President Obama’s Jumpstart Our Business Startup Act, (JOBS), it will be easier for startup businesses to go this route to raise funds than to attempt to jump through many hoops to get that funding. The bill basically states that business startups looking to grow can turn to online investors to gain the needed money to succeed.

Websites like Kickstarter, RocketHub, and Indiegogo let companies showcase their businesses to a wide audience and provide a crowdfunding platform where anyone can safely invite others to donate to their business or donate money. Each site gives businesses or project designers a place to create a profile consisting of relevant information about the project or business venture as well as establish a fixed financial goal of what they are hoping to raise within a set number of days. Rather than the customary investors most businesses seek out to obtain funds, crowdfunding is exactly what it sounds like – funding by the crowd, or general public. Backers who donate money can pledge a minimum sum to the fund and may receive a reward for their involvement.

However, not all companies who seek out money via crowdfunding actually receive the capital they’re hoping for, and in fact, the majority don’t. “The assumption is that everyone gets funded, but nothing can be further from the truth,” says Chance Barnett, CEO of Crowdfunder, a social networking site for investors and companies trying to raise money. “A majority (of companies seeking funding) aren’t companies that are deserving of capital today.”

The JOBS Act says that non-accredited investors can invest in a business and that same business can then raise up to $1 million a year without being obligated to register with the Securities and Exchange Commission (SEC). Since the JOBS Act has passed, websites devoted to helping companies connect with individuals looking to donate money to their crowdfunding efforts have seen their numbers rise to an all-time high.