Breakaway Funding partner PENSCO Trust Company just put out it’s 2015 Crowdfunding Report, and I was very pleased to contribute alongside 12 experts in the varied aspects of crowdfunding. Below is an excerpt of my article along with a link to download the complete report.
Community financing for the 21st century
Crowdfunding has created new opportunities for individual investors and community banks to profit by strengthening local economies. While the concept seems new, crowdfunding has been used to capitalize local businesses for hundreds of years. If you had an idea, you pitched it to the elders. If they liked it, they pooled their money and showed up regularly to make sure you were running it right.
Today, town elders have been replaced by peers who connect through the Internet and social media. Crowdfunding has democratized the investment arena by broadening the base of individuals who can legally invest in virtually any business they choose. This, in turn, is changing the roles of individuals and banks in funding local businesses. A new financing model is emerging. We call it “Community Capital.”
We Need Community Capital
When Congress passed the Jumpstart Our Business Startups (JOBS) ACT, it brought equity crowdfunding into the mainstream. It also conceded that bank financing for small businesses would not be available in sufficient quantity to fuel our economy. In the last decade, bank failures, consolidation and new regulation have taken a toll on lending. As of February 2015, 530 banks had failed, another 6,000 had been consolidated, and the number of community banks dropped more than 14,000 to less than 5,900. The continuing battle to understand, much less integrate, the Dodd Frank Act has also helped push community banks to take a “time-out” from financing.
This pause could have dire consequences for the economy. There are approximately 28 million small businesses in the United States. They are the root of job creation, generating some 65% of net new jobs, while propelling innovation and keeping those jobs local. They help local communities thrive but are having increasing difficulty securing funding from the banks that traditionally supported them.
As the former chief executive officer of a community bank, I see an opportunity to bring banks, investors and entrepreneurs together to create a powerful funding mechanism. If crowdfunding can shore up the balance sheets of small businesses, banks would have a flow of viable customers for commercial loans. Investors will benefit too because the loans can fuel growth without diluting their ownership positions
Fixing the Funding Highway
When banks lend to small businesses, they inevitably seek a state or federal small business loan guarantee in order to reduce their risk. One of the requirements of the guarantee is that the business owner has current “skin in the game.” For example, if a business needs $1 million, the owner may have to bring $200,000 in cash to the funding table. Experience tells us, however, that earlystage businesses and businesses in an expansion mode generally do not have that cash at the time they need to borrow, because they have already invested their liquidity back into the business. For a small business this can be true even at later stages of development.
As a result many small businesses miss opportunities to grow,…