Crowdfunding Is a Non-Starter

Despite new supportive legislation, most businesses are finding other ways to fund their companies.
May 24, 2012

Crowdfunding for small businesses isn't appealing to the crowd, suggests a new report.

Small-business owners are not enthusiastic about the law passed in March that lets them raise money by picking up investors on the Internet: In fact, according to a survey by Pepperdine University and Dun & Bradstreet Credibility Corp., just 3 percent say the new Jumpstart Our Business Startups (JOBS) Act ups the probability that they will seek money through crowdfunding.

Among the JOBS Act's provisions:  Small businesses can use direct mail or advertisements to market their securities to potential investors. (The SEC's current "general solicitation" ban essentially limits start-ups to marketing to investors they already know.) It also allows investments of up to $10,000 per investor from crowdfunding sites. The total investment via crowdfunding websites is capped at $1 million.

No Crowding for Dollars

There doesn't appear to be a rush: More than half (53 percent) of the some 6,000 business owners surveyed say the JOBS Act won't make it more likely that entrepreneurs will go the crowdfunding route.

Other findings: Nearly two-thirds (64 percent) of businesses with revenues under $5 million say difficulty securing financing is limiting their growth potential. And 55 percent said it's hampering plans to hire. To fund their companies, 71 percent say they ask family and friends. Some 62 percent use personal credit cards and 59 percent use business credit cards. Less than half  (45 percent) said they secured loans from banks.

“As long as business owners have personal assets to tap and it makes economic sense to do so, we may continue to see business owners continue this trend until the financing environment improves,” says Dr. John Paglia, director of the Pepperdine Private Capital Markets Project and a Pepperdine University associate professor of finance.

He adds that “Demand for credit is growing, but the supply is not meeting the demand, especially for small businesses. What we are seeing is business owners increasingly looking to unconventional financing options to grow their businesses and in some cases they are putting their expansion plans on hold altogether.”

Digging Into Their Own Pockets

The report also found that 46 percent of business owners with revenues under $5 million transferred personal assets to their business over the previous six months, compared with 25 percent of business owners with revenue between $5 million and $100 million.

What type of personal assets was most likely to be tapped? Personal savings or investments, according to 68 percent of all those surveyed.

The survey also compared financing struggles by state. Nevada won the title of state where businesses were quickest to claim their growth was limited because of financing (75 percent). And perhaps not surprisingly, Nevada also had the highest concentration (56 percent) of business owners tapping into their personal funds in the past six months. It was followed by Wyoming (55 percent), South Carolina (54 percent) and Colorado (50 percent). Arizona and Virginia tied for fifth place, with 49 percent.

Do your business plans include crowdfunding when it's available? Why or why not?

Photo credit: Hemera/Thinkstock