Despite tentative positive trends suggesting traditional small business financing will be easier to come by this year, many experts predict that 2012 will see the continued rise of alternative sources of funding.
Crowdfunding sites that encourage large pools of investors to contribute small amounts of money have undergone a significant growth in popularity over the last couple of years. One of the most well-known sites, Kickstarter, saw more than $125 million worth of pledges toward creative arts projects since it was founded less than three years ago.
However, relying on crowdfunding rather than more traditional sources – such as a community bank – turns launching a startup into a much riskier venture, according to a recent opinion piece for Entrepreneur magazine.
"Startups don't just need money – they need expertise," writes business reporter Carol Tice, who notes that the responsibility of providing this much-needed guidance often falls on investors. "In a crowdsourced model, no one investor has substantial money in the venture. So there's no one who could … make an entrepreneur take their ideas seriously for how to grow the business."
Indeed, investors' contributions to a startup are more than just monetary, and entrepreneurs who jump into a new venture with a dearth of sound financial investment advice to back them up could be heading for disaster.
Moreover, Tice adds, federal law currently prohibits members of the public from investing in startups. Those who want to make a high-risk investment need to meet the strict definition of an accredited investor, who must typically have upward of $5 million in assets. This means unless the law is changed, contributors who don't fit the criteria won't get a return on their investment, which can be a powerful demotivator.
Much of the negativity associated with securing commercial loans from financial institutions actually pertains to larger banks, while community institutions continue to thrive, due in part to the fact that they have less rigid processes and are more in-tune with the needs and concerns of small business owners. Instead of turning to crowdfunding, current and prospective entrepreneurs are likely better off considering a community bank that can provide financial tips and advice in addition to funding.