How Crowdfunding Provides Working Capital

A source of obtaining working capital called crowdfunding allows startups and small businesses to secure capital from a large group of individuals. To get a visual understanding of how it works, check out this quick, humorous video illustrating the process.

Managed on websites such as Kickstarter, crowdfunding collects money from “fans” in exchange for the good feelings of knowing they are helping launch someone’s dream – or a contributor can also receive swag, such as a branded tote bag or a copy of a finished CD. Once the fundraising goal is reached, the company receives the funds and makes the venture/product come to life. This type of funding is currently restricted to artists and small business owners.

For example, musical artist Ben Folds used crowdfunding to fund his band’s first album in 13 years. The band far exceeded its fundraising goal, and Ben Folds is planning on giving a portion of the remaining funds to charity. Other examples of crowdfunding projects are producing a documentary, supporting a theater show tour, and publishing a new comic book. In Austin, crowdfunding projects include the production of a video game, manufacturing a technology tool, and creating an online magazine.

The JOBS (Jumpstart Our Business Startups) Act signed last month will lift restrictions and allow more entrepreneurs the ability to raise money by exchanging equity stakes. Following an SEC review, the new guidelines will be released early next year and non-accredited investors will be able to buy business equity. Security regulations will still present some obstacles for investors.

Crowdfunding opens the doors to another innovative way to obtain working capital, and is a resource to help many reach their goals. While it is a good marketing tool, it works best with a current support base that is willing to invest and then spread the word.

Crowdfunding differs from asset-based lending and factoring and is not the solution for every business. If you have questions about obtaining working capital, give us a call to discuss your options.