2016 brought an innovation in financial services called Regulation Crowdfunding, or Reg CF. It is the final step in the implementation of the Jumpstart Our Businesses Startups Act (JOBS Act) which was signed into law in 2012. Reg CF means that for the first time, anyone over 18 years of age will be able to invest in private securities offered by startups seeking equity capital or businesses that need debt financing.
For the most part crowdfunding has been used to fund new companies or products in exchange for equity in the company or simply to receive their initial product offering. Funding Wonder, a licensed Reg CF portal, is among the first to apply crowdfunding to finance loans for small and medium businesses. This offers a viable alternative for loans under $250,000, an amount that is most needed by small businesses and typically the hardest to finance.
If you are considering using crowdfunding for a business loan, the first step is to determine if it is the right approach for your business. The name says it all. To successfully raise money using crowdfunding you need to draw a crowd. Some businesses are perfectly suited to this form of financing. The business owner may have an extensive network of friends and family that will contribute to get the ball rolling. They may also have a big customer list to draw from and the ability to offer incentives.
For example, the owner of eight health clubs with a membership list of 30,000 decided to use crowdfunding to open a ninth club. He offered his member base the opportunity to invest in a loan to open his new club, earn a good interest rate on their investment and for amounts over $500, receive a year extension on their current membership. This not only helped him raise money but reinforced his relationship with many of his customers. Those that participated now had a vested interest in the success of his clubs.
Assuming you are confident that your business is a solid crowdfunding candidate, you must prepare to mount a campaign by pulling together all the information you will need to get approved for posting a loan and creating your loan offering document. Here are the general categories of information that are required:
- Personal information such as name, address, birthdate and social security number.
- Business information such as legal entity, tax ID, detail on owners that hold over 20% of the business and a list of any outstanding debts.
- How much you want to borrow, for what duration and for what proposed interest rate.
- What you intend to do with the loan.
- Personal documents such as bank statements and tax returns.
- Business documents such as operating agreements and tax returns, and financial documents that were reviewed by your accountant including balance sheets, cash flow and profit & loss statements.
- Marketing materials including business description, photos and videos.
- Your business experience and that of the management team.
The marketing materials are particularly important to mount a successful campaign. Most casual investors will be greatly influenced by a compelling business description with supporting photos and videos of the business or its products.
The final step is to generate and file a legal document called the Form C on EDGAR, the online public database of the U.S. Securities and Exchange Commission (SEC). An online app called iDisclose makes the generation of the Form C easy. iDisclose takes you through a sequence of questions about the business (similar to TurboTax) such as key personnel, competitors, suppliers, prior transactions, how you intend to use the funds, etc. and combines it with the informational items listed above. Then it automatically generates a document that is ready to be reviewed by your lawyer and can be posted directly from iDisclose to EDGAR.
Now you’re ready to go. But you must think of the crowdfunding process like it’s a political campaign. You have a finite period to get a large group of investors to rally around your cause and it is up to you to drive it with all the tools at your disposal from email to social media. And if we learned anything about running a campaign in the last year, make sure you tweet regularly to your followers.