Equity Crowdfunding’s Role Could Expand During the COVID-19 Crisis

The U.S. government’s Paycheck Protection Program (PPP) was supposed to deliver much-needed loans to small businesses.

The way the system was set up, a large portion of these loans would be “forgivable,” meaning not all the money has to be paid back. That’s the type of loan everyone wants.

Understandably, demand for these loans was sky-high. The initial $349 billion in funds ran out in just 13 days.

According to a New York Times report, more than 200 publicly traded companies received at least $750 million from the program. Some companies have since returned their loans. But I suspect we’ll never get a full accounting of where exactly the $349 billion went.

Meanwhile, actual small businesses struggled to get PPP loans. A survey by LendingTree showed that 60% of small businesses it questioned had applied for a PPP loan, but only 5% actually got one!

Since the money ran out so quickly the first time, Congress has approved another $310 billion in funds for the PPP program. And because the program took so much heat for giving to big businesses last time, some small changes have been made.

Big banks have dominated the program from the beginning. So this time, the Small Business Administration (SBA) created a single night where big banks are locked out of the program. As reported by Politico

The SBA told banks that for the rest of the day, starting at 4 p.m. and ending at 11:59 p.m., its systems would only accept Paycheck Protection Program loan applications from lenders with less than $1 billion in assets, representing the smallest in the industry.

That’s right. For a single evening, small banks will have sole access to the program. Presumably this will result in more loans to real small businesses. But is it really enough? A single night of access doesn’t seem to go nearly far enough.

The Private Sector’s Role in Funding

Clearly, small businesses cannot rely on the government to be rescued. Most of them will need to rescue themselves.

I believe one of the best ways to do that is by using equity crowdfunding (ECF).

If you know small business or startup owners who are looking for alternative sources of funding, tell them about ECF. It’s a way for them to potentially raise up to $1.07 million with minimal financial reporting required.

And ECF will give them more than money. Any small business or startup that has a loyal customer base would be wise to consider inviting these people to be investors. If you give your best customers a chance to become shareholders, the benefits of that can be very powerful.

Once a customer becomes an investor, they have a vested interest in your business succeeding. They’ll recommend it to friends, give helpful feedback and continue to support it with their own dollars.

Here’s a list of equity crowdfunding “portals” where startups and small businesses may be able to raise money.

Alternative sources of funding are more important than ever today. Many companies are learning that when they need funding most, they can’t count on traditional methods like bank loans.

I hope this crisis will bring more attention to the vast potential of ECF for both startups and small businesses. It truly has the potential to transform how capital formation happens in America.

Of course, ECF won’t work for every business. A business needs to be growing quickly or needs to have a large and dedicated customer base who is likely to invest.

For businesses that aren’t a good fit for ECF, traditional crowdfunding may be a better option. GoFundMe is helping many small businesses stay afloat by helping them collect donations from customers and the local community.

I hope you’re all doing as well as possible given the circumstances.