Equity crowd-funding developed fairly recently and gives new businesses the opportunity to sell shares of ownership in their business in exchange for funding. But there is considerable risk involved with this type of commercial lending.
What is equity crowd funding? It is similar to rewards based crowd funding, but differs in that borrowers offer shares, rather than rewards, as incentives to potential investors in order to fund their business. Investors buy a stake in startup companies on accredited online platforms. This type of commercial lending was legalized by the JOBS Act in 2012. Since the law was implemented 1.27 billion dollars has gone to over 6,000 companies. Startups can raise up to one million dollars per equity crowdfunding campaign. Investors are more likely to consider the borrowers idea rather than the borrowers credit score. Making equity crowd funding ideal for businesses with a clear growth potential or for entrepreneurs with a well thought out and realistic idea.
One benefit of equity crowd funding is that there is no debt involved. You are selling shares in your future business so there is no need to plan for any loan repayments. Throughout the process your ability to market your idea may be more important than your credit score. This allows those without good credit or sufficient collateral to raise the funds they need to start their businesses. Another benefit is that a successful crowd funding campaign translates into future marketability for your business. If you can convince investors to fund your start-up you’ll likely be able to convince potential customers as well.
But this method of financing is both risky and potentially very expensive. If you are seeking over half a million dollars you are required to provide detailed documentation to financial authorities. This means you will likely have to hire an experienced account to prepare the documentation required. The crowd funding campaign itself presents an additional expense. If you don’t have the skills or knowledge to promote your idea to potential investors you may have to hire an outside marketing agency. There is also the expense of fees charged by equity crowdfunding platforms. Many of these sites can charge up to 12 percent of the total amount raised.
Equity crowdfunding presents a real benefit, but only in specific situations
If you have a strong idea, have confidence in its potential, believe in your ability to convince potential investors and are willing to give up some ownership in your future business then equity crowd-funding may be right for you. If this is not the case it probably best to consider other financing options.
There is always the potential that your crowd funding campaign will fail. Ask yourself if it is worth the risk.
You must make a significant investment up-front in order to pursue equity crowdfunding .The financial documentation, the platforms fees and the expense of any equity crowd funding campaign must always be considered against the backdrop of potential failure. Even after all the expenses involved, an equity crowd funding campaign can still fail. Meaning all the money you spend on a your campaign could wasted. It is important to consider whether you are willing to risk these expenses before pursuing equity crowd funding.
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.