Idea-stage and early-stage startups probably have the toughest time finding cash than any other stage of business. Although the American Dream is to take a great idea and turn it into a thriving business, it’s rare a great idea alone will convince a lender to fuel your dream.
In it’s most basic form peer-to-peer lending has been happening since ancient times and crowdfunding platforms like Kickstarter, have helped countless entrepreneurs get their great idea off the ground today. Prior to October of last year, investors got the satisfaction of helping a budding entrepreneur get his or her feet off the ground, they may have been rewarded with product, or had advance notice of something new on the horizon—but they didn’t have equity.
Millions of dollars have been successfully raised this way by entrepreneurs who either weren’t scalable enough to draw much attention from equity investors like venture capital firms, or just couldn’t generate income any other way. That changed in October of 2013 when the SEC (Security and Exchange Commission) voted on new rules under Title III of the JOBS Act.
The new rules allow crowdfunding portals, like EquityNet, to offer and sell securities online. In other words, entrepreneurs can offer equity in their great idea to raise capital on approved crowdfunding platforms—up to $1 million per 12-month period.
These new rules basically repeal Depression-era legislation designed to protect uninformed private investors from being duped by unscrupulous sales people who were selling fraudulent “investments” door to door at the time.
Although peer-to-peer lending might sound like an easy way to find the capital you need, like anything worthwhile, there’s nothing easy about it. In it’s basic form, a peer-to-peer loan may be as simple as one person lending to another person—but the borrower should beware. Sometimes, if you’re not careful, you might not get what you bargained for. Make sure you’re working with a credible crowdfunding platform and that you’ve investigated what you’ll need to do before you start the process.
I have friend who recently funded a T-shirt business on Kickstarter. He got the cash he needed, but I’m sure he’d tell you it wasn’t easy.
Whether or not you turn to a crowdfunding platform or the generosity of your family and friends (something I also consider peer-to-peer lending) make sure you know what you’re getting into. Oh, and good luck.
Click HERE to learn more about business credit cards.
Learn more about asset-based lending HERE.
Click HERE to learn the ins and outs of financing a franchise.