Regulation Crowdfunding Tackles The Startups Shunned By Banks

Government-backed loan schemes like the Paycheck Protection Program (PPP) connected vital capital to small- to medium-sized businesses (SMBs) in need of aid to stay afloat.

While helpful, the availability of affordable financing for SMBs is not necessarily typical of a market in which smaller firms can struggle to access funding. And when federal funding runs dry, SMBs will continue to need financing to remain viable and thrive in a post-pandemic market.

The challenge for accessing financing is particularly acute for early stage technology companies, according to Jason Crystal, co-founder and CEO of crowdfunding platform Miventure, a company slated to launch before the end of the year.

Built on the back of Regulation Crowdfunding under the Jumpstart Our Business Startups (JOBS) Act, Miventure operates as a funding portal to connect SMBs with unaccredited investors, a relatively new paradigm for SMBs used to turning to traditional banks or venture capitalists to back their companies.

Speaking with PYMNTS, Crystal discussed why some businesses may be better positioned to go the crowdfunding route when they need financing. Plus, he offered insight into how SMB sentiment fares in a volatile market.

The High-Risk Perception

Even with a surge in PPP financing, many early-stage businesses continue to struggle to access capital from traditional sources.

“Banks really only lend money to people who don’t need money,” said Crystal. “There’s a big gap in the market between people who have access to debt and the credit markets, and people who don’t.”

Technology-centric startups often sit within that gap, he said, thanks to the perception that these digital-native companies are riskier than a brick-and-mortar storefront. Typically, the alternative for an early stage technology firm that’s been turned down for a loan from a bank or credit union is to turn to venture capital, which often leads to dilution — not always the best route for a startup that isn’t yet worth a lot of money, Crystal noted.

Despite the high-risk reputation, tech businesses can be just as viable as a laundromat or a car wash. Crystal said in today’s modern economy, any kind of SMB can be a digital-native business.

“The line is getting blurry between what’s a tech company and what’s not a tech company,” he said. “Every company is essentially a technology company, nowadays. You need a website, you need a digital marketing approach. And the pandemic has accelerated the digitization of business.”

That line will continue to blur, he said, as the intersection between digital-native and brick-and-mortar deepens.

An Optimistic Outlook

How that intersection will impact the ability for early-stage businesses to access traditional funding has yet to be seen. But what’s important is for these companies to have options, particularly when they’re turned down for a bank loan.

For many of these young companies, the alternative is a merchant cash advance, a source of capital that is notorious for providers that impose predatory rates on borrowers. While still in its early stages, Regulation Crowdfunding and other frameworks, such as Regulation A+, have expanded choice for business owners, although it will take some time before awareness and understanding of this route to capital grows among entrepreneurs.

The process of accessing funding via Regulation Crowdfunding can be similar to accessing a bank loan, Crystal explained. Business owners need to present potential investors with a business plan, financials and key data surrounding forecasts and other information. That can be tricky for some startups that may not have this information readily available.

According to Crystal, business owners interested in this funding avenue may find value in working with an accountant to get their disclosures in order. Many SMBs, particularly those that find themselves in dire straits as a result of the pandemic, will find this process worth the effort as they look ahead.

With government-backed SMB bank loan programs inevitably coming to an end, many startups will struggle to access capital, and having as many options as possible to raise funds will be key for economic recovery. Luckily, business owners retain a positive outlook for the year ahead, said Crystal, citing Miventure’s own research.

“We were surprised by the optimism in the small business community,” he said. “Banks and credit unions are likely going to restrict credit to small businesses, and you’ll continue to see the rise of FinTechs plugging that hole… We need to see more fair options in between the banks and credit unions, and the predatory lenders.”