The Inclusive Economy
Can Crowdfunding Accelerate Economic Development?
By Jimmy Crowell on 05/25/2012 @ 03:00 PM
EDITOR'S NOTE: This is the third and final installment in our self-employment blog series celebrating National Small Business Week 2012. Click the links at the bottom of this page to check out the first two blog posts and use the comments to let us know what you think about the potential of crowdfunding. CFED gratefully acknowledges the support of Sam's Club for their support of small business owners and of National Small Business Week.
With Obama’s recent signature on the Jumpstart Our Business Startups (JOBS) Act, crowdfunding has been receiving a lot of buzz lately. But, can crowdfunding really accelerate the growth of entrepreneurship and economic development?
Prior to the JOBS Act, businesses couldn’t rely on crowdfunding for capital because of government restrictions and red tape. Often times, small business owners had to finance their enterprises through loans, sometimes backed by the value of their homes. This is a dangerous game, especially for low income entrepreneurs who have trouble accessing fair and secure lines of credit. Other options for obtaining capital, such as from venture capitalists, are few and far between and not a possibility for microbusinesses operated by low to moderate income entrepreneurs. Although 65% of all jobs are created by small businesses, only 17% receive business financing from venture capitalists, angel investors or bank loans.
Existing laws and regulations put in place by the Securities and Exchange Commission (SEC) prohibited unaccredited investors looking to spend small amounts of money to capitalize small businesses. With the JOBS Act, Main Street will have access to capital from small time investors who could previously only invest in giant public companies on Wall Street. Small businesses can raise as much as $1 million a year without having to do a public offering, a process that can cost thousands of dollars.
But still, what type of an impact will crowdfunding have on microbusinesses operated by low income entrepreneurs? Microfinancing, or giving small loans to low-income entrepreneurs who have no access to credit, has helped many microbusinesses. Crowdfunding essentially does the same thing; it circumvents traditional funding mechanisms to open up capital to a larger market. With the internet and social networks as the main platform for crowdfunding, funding opportunities can reach many more people.
Donation-based crowdfunding, from websites like Kickstarter.com, may be the best option for low income entrepreneurs who may not make enough profit from initial investments to offer a return on loans made. However, there are other unique ways to incentivize loaning small amounts of money to microbusinesses. LuckyAnt.com reminds funders of the important service they are providing their communities but also allows businesses to offer coupons and special deals for small time funders.
Will crowdfunding have the same impact microfinancing has had on low income entrepreneurs? Only time will tell, but the potential of crowdfunding is definitely exciting.