What is Crowdfunding?
Crowdfunding is by definition, “the practice of funding a venture by raising small amounts of money from a large number of people.” Historically, it was used to support causes of all kinds, such as theater troupes and musicians seeking to raise money for productions via “pass the hat.”
Solving an 80 year old problem
For the last 80 years, obtaining capital to start, grow, or expand a privately held business has been challenging for entrepreneurs and business owners. The reason for this challenge has been the limited forms of capital formation available to these businesses. Banks have long been a well known source of capital. However, commercial bank financing can be difficult to obtain for many businesses, because they don’t qualify for the banks’ required standards to receive financing.
Banks are collateral-based lenders, and typically will only finance a commercial loan if there is deemed adequate collateral to foreclose upon should the business fail to repay its loan obligations. Many business owners either simply don’t have this collateral to offer up, or may not be willing to risk their family’s financial shelter to start or grow their business.
Private equity – stock purchases or loans made by individuals from/ to businesses – have had onerous restrictions dating back to 1933.