With the passing of the JOBS Act of 2012, small businesses will have greater access to capital through Internet crowd funding. The basic concept is to raise money via an online funding portal through small contributions from a large number of people that wish to support the dreams and efforts of others.
Last week, we discussed two Internet crowd funding models – "All or Nothing" or "Keep it All." Another category includes raising funds for business ventures by either giving up some level of equity in the venture or by obtaining interest bearing loans.
While the loans are gifts or loans are available, the equity portion will not be available until January 2013 when the Securities Exchange Commission releases the final rules. Still, sites already gearing up, with the following sites – www.40billion.com, www.fundable.com, www.WeFunder.com and www.StartupAddict.com – extending similar offerings.
Here we review two of the sites to get more of a picture.
Here the entrepreneur must start a fundraising profile, which includes the amount needed. Currently, equity investments or sales of stock or shares of the company are not facilitated on this site. A selection must also be made regarding the funding type: gift contributions, direct loans, or commercial paper short-term loans.
Then you must provide the potential funders (givers, donors and lenders) with an overview of your vision for the business. Upload your business plan or at least an executive summary, photos, videos, and/or a PowerPoint presentation. If you don't have a business plan, there is a format for one on the site. Additionally, you may offer free samples to participants in return for their support.
Next, you add your own contacts to your network. Then send email invitations to your friends, family and others. You encourage them to send the invitation to their friends and family. This is putting your social networking to good use. People who are interested in funding your venture may provide funding from $25 to $10,000 each or from $100 to $1,000,000 as a commercial paper loan.
Funds may be collected on the site, via the US postal service, or deposited into the entrepreneur's business PayPal account. It is free for the first month for a limited time to raise funds from gifts and donations. After the first month, there is an extension fee of $9.99 per month, if the entrepreneur wishes to extend the period for six more months. If the entrepreneur chooses to have the site collect the funds, funders may make payments online by credit card, debit card or PayPal. At the end of the period, a single check will be mailed to the entrepreneur approximately 30 days later. 40Billion.com charges a fee of 5 percent and PayPal charges a fee of approximately 3 percent.
As it relates to loans, 40Billion.com makes it simple for borrowers and lenders to formalize a business loan between friends or family by generating a custom loan document or promissory note. According to 40Billion.com, each borrower and lender can view the loan document, print it, sign it and decide how they would like to transfer the funds offline (via mailed check or in-person). It's free for a limited time for direct loans, and after the first month there is an extension fee of $9.99 per month, if the entrepreneur wishes to extend for up to six more months.
As indicated by the site 40Billion.com, for commercial paper (short-term loans for operating expenses only), it is easy for entrepreneurs and funders to sell and purchase commercial paper promissory notes. The borrower and lender can view the promissory note and print it, but only the borrower is required to sign it. Both parties decide how they would like to transfer the funds offline (via mailed check or in-person).
It's free for a limited time to pursue commercial paper and after the first month there is an extension fee of $49.99 per month, if the entrepreneur wishes to extend the time for up to six more months. It is also highly recommended that funds are raised through a business entity such as a corporation or a limited liability company.
This site is an all-or-nothing funding site, which means that your goal must be met or the entrepreneur will not receive any funding. In addition to using personal contacts, the entrepreneur will also have access to the fundable community.
Prior to building a profile, there is a selection process. The entrepreneur must submit an application for entry onto the Fundable platform. The evaluation criteria can be reviewed on the site reviews the applications to make sure the startup is a good fit. Once approved, the entrepreneur is allowed to build a profile and pursue funding.