growth capital

Q. Have you used crowdfunding sites to raise money for a business project. Asked on LinkedIn by Brandon Schaefer

I see potential problems with doing this. A business project is meant to make a profit, and earn a return for the investors. If the investors are crowdfunders, how do they ever benefit other than feeling good about supporting a business they like?

I see four ways to view such a contribution:

1. It’s a gift. I don’t expect to get it back. I’m giving it to you because I believe in what you’re doing.

2. It’s a loan, with no recourse. If you do well, I’d like my money back, with interest. If you go belly up, so be it.

3. It’s prepayment for services. I’ll put money into your business in the expectation that when you get going, you’ll provide me with product or services of comparable value. Perhaps a plaque with my name on one of your cafe tables.

4. It’s an equity investment. I expect to own a piece of your business, have a share of the profits as dividends, and to benefit on the upside if you sell it later at a premium. I want oversight on how you’re running the business.

If I’m a crowdfunder for you, several things would really irritate me, perhaps to the point of lawsuits:

1. You squander the money, just out of lousy planning and management

2. You divert the money to other uses, such as fancy offices or expensive travel

3. You make a bundle and ignore me. With my $1k investment (among others) you grow your company and Google buys you out, making you rich, then you won’t take my phone calls.

How are these potential situations handled on crowdfunding sites? What are the obligations of the person receiving the funds? What are the rights and recourse of the contributors? This is why we have contracts. The crowdfunding deals I’ve heard of sound kind of loosey goosey.  Fuzzy agreements now = lawsuits later.

If it’s for a good cause–say, you’re raising money to go plant trees to restore the rain forest–then I view my contribution as a gift, and expect nothing back.

But if I’m investing in a business that expects to make a profit, then I want some contractual accountability.

So when you look at Crowdfunding sites, see how they address all these questions and others

 

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Q. How can I finance a small business project without collateral?  Asked on High Table by Shehzad Aman

A. Here are a few ways to finance without collateral.

1. Your savings. You should be as demanding on yourself as a banker would be to demonstrate the viability of your proposal.

2. Your family or friends. They may loan to you without collateral because they know and trust you. Your obligation to repay is even stronger than it is with a bank.

3. Crowd funding. It’s the latest rage. I have read a lot about it, but I’m not sure how successful people have been raising capital this way. Who can get it, for what amounts and purposes? What promises do they have to make?

4. Your own creditworthiness. If you have a good credit score and good relationship with your bank, you should  be able to get a non-recourse loan for several thousand dollars.

5. Charging it on your credit cards–the all-time worst way to fund a business, yet one that is used all the time.

To borrow money without collateral, you need strong and trusting relationships with people who have money.

Some may suggest venture capital. But VCs aren’t interested in “small.”

There may be business development grant or loan from a foundation or government agency, but this is not something to count on. None of my clients have ever gotten enough capital this way to start a business.

Perhaps you are being too restrictive by saying “with no collateral.” Ask yourself what kind of collateral you have. For example, if you purchase equipment, the equipment itself serves as collateral.

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Shehzad, I answered this question as if you were in the U.S. But it looks like you are in India. I know nothing about the small business banking sector there. I suspect that personal relationships are even more important. But there may also be business development loans from some agency that wouldn’t be available here.

 

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