By Candace Hewitt
When Congress passed the Jumpstart Our Business Startups Act in April 2012, the finance and small business communities were both excited and befuddled. Title III established approval of crowd-sourced securities—allowing crowd-funding web portals like Kickstarter to issue equity loans or revenue-sharing agreements from individual investors.
But since then, the SEC has dragged its feet with follow-up regulations for crowd-sourced equity funding; meanwhile, small businesses have been searching for urgent solutions to their funding needs. There’s been much chatter about small businesses driving our economic recovery, yet finding best-fit financing remains a remarkable challenge for entrepreneurs in our credit-restricted economy.
With recession-inspired interest in repairing our local economies, many investors have been seeking ways to help finance growing small businesses that have real impact on local communities. From moving money out of Big Banks, to buying groceries at the farmer’s market, we can now add local investing to our toolbox for the Main Street economy.
Author Amy Cortese dubs the burgeoning trend, “Locavesting,” in her book of the same name. The phrase encapsulates efforts to galvanize finance for small (-er) businesses that help circulate money within local economies, rather than “exporting” money to Wall Street and the global capital markets.
Alex Binkley observes, “People are trying to put their money into their own community, whether that’s shopping local, or investing local, or lending local.” Binkley is the co-founder of FundingCommunity.com, the first crowd-sourced lending platform launched in the U.S. FundingCommunity.com launched in May with a goal to help individuals become lenders (no accreditation necessary) to small and growing domestic businesses. With five to ten percent interest rates, FundingCommunity.com delivers better rates to investors than average bank savings.
How does crowd-sourced lending with FundingCommunity.com work?
A borrower with reliable revenue could seek a short-term loan of nine months or less. The borrower raises funds for the loan through social media and marketing, galvanizing supporters of the businesses to act as lenders. FundingCommunity.com aggregates the pledged loans from individuals into one obligation for the borrower, setting terms and ensuring that the borrower can guarantee the loan through company assets or personal liability.
TriplePundit asked Binkley to give a glimpse of the insights at work in this lending model, and what sort of companies would find this loan a good fit. Binkley explains, “The ideal company is a small business that finds that it is growing quicker than it can handle, and needs some amount of capital injection to support that growth.” Such a company may be just getting off the ground, and as Binkley describes, “has a strong social media following, but probably couldn’t get a loan from a bank at all,” given its nascent stage of growth.
Realistically, small companies may not be able to rely on their own customer contact lists to raise the capital needed. FundingCommunity.com is in a position to co-market the business through its own promotional media. In this way, the platform offers borrowers added value through lead generation. Binkley expects, “to show these borrowers that we’ve been able to turn some of the lenders who previously didn’t know about the business, into customers of the business.”
What should triple-bottom line companies keep in mind about crowd-sourced funding, lending in particular?
Binkley points out that sustainable businesses may, “be able to engage a passionate group. It might not necessarily be passionate about your company, but because it’s passionate about the space you’re in, it might be more likely to fund your loan.”
For many businesses working to benefit the environment and society, low margins and cost-savings are constant pressures. Crowd-sourced lending powered by social media can help ensure loans at affordable rates, by cutting “Big Bank” intermediaries and their pricey overhead out of the equation, Binkley explains. Lower interests rates for borrowers met with higher returns for savers seems like exactly the solution many financial managers have been seeking.
FundingCommunity.com still needs to be proven as a viable solution for a range of small businesses. The lender will need to carefully assess its borrowers’ capability to fundraise online, and of course, manage short-term repayments. Binkley also has an eye towards better understanding individual lenders—What inspired them to contribute? How “local” are they? Do they become customers?
The need for capital lending to responsible, local economic development looms large, and the payoff for investors of even modest amounts could be significant. As Alex Binkley sees it, “Rather than putting that money into a bank account and earning 0.5 percent and seeing the banks lend to businesses at 20 percent, the individual can say, ‘I’d rather lend it to the business.’”
Candace Hewitt is a brand strategist and social impact analyst, offering businesses and non-profits inspiration for community engagement, sustainability reporting, strategic messaging, and policy analysis. Based in Brooklyn, NY, Hewitt blogs and tweets about sustainable development and lifestyle in urban communities and emerging markets. She holds a Master’s in Public Policy from Duke University.