We all wish that we played a bigger role in determining which businesses stay and go to our local communities. Too often, people see their favorite coffee shop, restaurant, or brewery go out of business and another major chain taking its place. Small businesses play a vital role in our communities – they create jobs, they give neighborhood personality and character, and offer food, drinks, and products people can’t get anywhere else.
At a time where public and private investment is drying up, small businesses are facing a huge challenge to stay afloat. A large portion of the US’ 30 million small businesses is seeing revenues drop precipitously as responsible citizens comply with their state’s COVID-19 quarantine and containment practices. Uncertain market conditions have made outside investments difficult to secure, even from SMB-friendly credit unions and local banks, making running a business even more difficult for entrepreneurs. However, there is one solution that often goes overlooked, simply because many small business owners don’t know it exists.
Regulation crowdfunding allows ordinary people across the country to invest small amounts of money in the community businesses they love. Instead of small business owners having to jump through hoops to prove their business is worthy of a bank loan, crowdfunding allows them to provide their customers and community leaders with an opportunity to invest in their business and share in its success. Local businesses that have worked hard to build a loyal fanbase often use crowdfunding to rally their supporters to tap into much-needed capital.
Crowdfunding provides small business owners with the unique ability to not only dictate how much money they raise, but also the terms of their fundraising. For instance, a small business can position their offering in a few different ways to attract investors that align with the goals of their campaign.
The first option is to position it as debt, which operates like a traditional loan that is paid back at a set interest rate. Entrepreneurs need to ensure they set an interest rate that investors will find appealing and don’t get carried away with the freedom to set their own terms.
Another option is to position the offering as a revenue share, which allows investors to receive a percentage of sales until the loan is paid off. Revenue sharing is a great avenue for small businesses that are just getting off the ground, as it forgoes static monthly payments in favor of expenses that scale with the business as it creates more revenue. This option asks investors to take on risk, but it represents a great marriage between investor and company, as you both benefit from increased revenue, incenting investors to work harder as brand ambassadors.
The final option for SMB owners is to offer investors equity in their business. This follows the same rules of traditional venture capital where entrepreneurs offer a piece of their company in exchange for capital. This model can be well suited for small businesses looking to scale while attracting savvy investors with access to greater sums of money.
Each of these options provides business owners with the ability to maintain control over their business and appeal to different types of investors.
Given its highly personal nature, savvy small businesses are able to build brand equity and momentum for their business while raising capital. That’s because the money raised isn’t just coming from a bank, it’s coming from their customers, supporters, and new potential fans. Investments aren’t part of someone’s day job; they are often a sign of the love and support from the company’s biggest fans and supporters. Oftentimes, the fundraising campaign is used strategically to build buzz for small businesses and help them become fixtures within their communities.
The role small businesses play in our community can’t be underestimated. They represent the backbone of our country and the bloodline of our communities – adding excitement and character to the places we call home. While so much is uncertain in the world, small business owners should strongly consider a grassroots crowdfunding campaign if they need access to capital to keep their operations running and employees paid.
Co-Founder, Chief Strategy Officer