Jump Start Your Small Business Loan with Crowdfunding

As an entrepreneur, Candace Klein, founder and CEO of SoMoLend, knows the pain of being on the hunt for money when it’s scarce. While things have loosened up a bit since the financial crisis began, financial institutions, such as banks, are still tight-fisted.

When an entrepreneur sees a problem, she also sees opportunity. So it is with Klein. She’s connecting entrepreneurs who need money with funders online.

SoMoLend provides loans rather than equity. “People understand loans. You make a loan, you get paid back,” said Klein. Getting an equity stake in return for capital is more complicated to understand and, while the reward can be greater, so, too, is the risk. As a result, only a tiny fraction of people who quality to do this type of investing (angels) actually do it.

Main Street businesses, such as retailers, restaurants, hair salons, gyms, and so on, are the most likely to turn to SoMoLend for loans. Klein anticipates that funders may initially come from trusted circles of relationships, such as friends, family, and customers. Lenders may also come from other business owners who have established a relationship with the borrower through a business association, such as a Chamber of Commerce or networking group.

As I’ve mentioned before, funders believe that you’re trustworthy when they see that other people you know are supporting your crowdfunding campaign. Once that trustworthiness is visible, you can attract funders you don’t know.

The average loan request on SoMoLend is $157,000. Klein’s goal is to provide loans as small as $15,000 and as large as $1 million.

For centuries, people have been getting loans from people who know them, to tide them over until the crop is harvested or the herd is fattened. Crowdfunding is a modern twist on the bridge loan; it does the same thing using an online platform.

The government recognizes the potential crowdfunding has to drive economic recovery. In April 2012, Obama signed the JOBS Act (Jump-start Our Business Start-ups), which will allow average Americans not just the wealthy to fund small businesses via crowdfunding. The move to this new platform has been delayed by the Securities and Exchange Commission concerned about fraud. The SEC is taking its time to develop the rules and regulations regarding crowdfunding.

In the meantime, companies are figuring out ways to provide funding within the current rules. For SoMoLend, this means providing the platform for small businesses to connect to financial institutions, accredited angel investors (i.e. wealthy individuals), friends, family, business associates, and even government funders. Yes, financial institutions are hedging their bets by checking out the potential of this new funding source. KeyBank has committed to lending at least $1 million and as much as $50 million via the SoMoLend platform. Returns on investment on peer-to-peer (P2P) lending sites (a similar funding method) have been in the 10% range. P2P lending focuses on one individual lending to another, crowdfunding aggregates many small investors to provide a loan to one small business.

SoMoLend provides some basic due diligence, but stresses to the lenders that they need to thoroughly check out borrowers.
Learn more about crowdfunding:

• Why Crowdfunding Is a Game-Change for Women Entrepreneurs
• Can Crowdfunding Live Up to Its Potential for Women Entrepreneurs?
• 4 Tips for a Successful Crowdfunding Campaign

How will you attract crowdfunding for your business?