Why small businesses are turning to crowdfunding for coronavirus relief
Crowdfunding platforms are seeing a sharp uptick in demand from small businesses in need of funding.
While the government's Paycheck Protection Program is handling thousands of applications, many small businesses are struggling to secure funding from the sweeping initiative. While the PPP offers loan forgiveness when borrowers use the funds for approved expenses, including payroll, some costs are excluded.
Those factors may be driving more small businesses to consider locally sourced capital campaigns.
Inquiries for crowdfunding have more than quadrupled at MainVest in Salem, Mass., since the pandemic hit the economy, said CEO Nick Matthews.
“It’s created an immense amount of business inbound,” said Matthews, who was Uber’s senior manager in Boston before co-founding MainVest in March 2018. “Our biggest challenge is handling an acute increase in volume.”
Honeycomb, a Pittsburgh crowdfunding firm, is also seeing a spike in inquiries, which are running about 20 times higher than pre-crisis levels, said CEO George Cook.
Another crowdfunding platform, StartEngine, has seen traffic increase by 62% over the past zonth, said spokesman Max Crawford. For StartEngine, the increased traffic comes on the heels of its best quarter ever. The Los Angeles company brokered deals totaling $24.4 million.
The staying power of crowdfunding has important implications for banks. The model is typically marketed as a piece of a business’s funding puzzle, while emphasizing relationships with traditional lenders. During the coronavirus outbreak, crowdfunding might be instrumental in helping many small businesses survive.
StartEngine offers equity and debt crowdfunding. MainVest and Honeycomb focus on debt crowdfunding.
A successful crowdfunding campaign can serve as critical validation for the businesses involved. Many of those companies also seek small-business loans with banks, which like to secure community support before signing off on a loan.
That was the case for Jonathan Gilman, co-founder and executive chef at Brato Brewhouse and Kitchen in Boston. Brato raised $104,000 in late 2018 though MainVest. Its second campaign, which is set to end Tuesday, has generated $37,000.
At the same time, Brato has raised the majority of its financing from banks, Gilman said.
Banks "are really going to want to see that extra level of support and capital skin in the game,” Matthews said — especially coming from local investors with an intimate knowledge of the business.
Recognizing that a number of small businesses are debt-averse, Honeycomb is also marketing what Cook terms loyalty bonds. The bonds are actually a gift card subscription that offer buyers a 30% premium on their purchase, and pays off in four equal installments over two years.
Honeycomb is overseeing six active loyalty bond campaigns. It is also managing 13 regular crowdfunding campaigns, with more scheduled to begin soon.
“We’re starting to see light at the end of the tunnel,” Cook said.
To be sure, there is risk involved for people participating in a campaign. Those who buy into a loyalty bond are betting that the business will remain open so they can realize a return on their investment.
In addition to increased inquiries from small businesses, MainVest and Honeycomb say their pool of investors has remained robust despite the economic downturn.
“People are probably looking for alternative assets,” Cook said. "They're looking for investment classes with less risk."
MainVest has benefited from a similar trend as people take steps to keep their favorite businesses afloat during the pandemic.
“The public is recognizing how crucial these businesses are to their everyday lives,” Matthews said. “That, combined with some of the crazy volatility in the public markets, means the idea of diversification into this asset class … has definitely become more attractive.”
“Investors remain excited about the opportunity to invest in and support the next generation of innovative companies and the community businesses that need their support,” Crawford said.