How The Pandemic May Crack Open Crowdfunding For Main Street, USA

For all the pain that the pandemic has caused small business owners, the crisis has also showcased entrepreneurs’ resiliency and creativity in how they navigate economic and business disruption.

Business models are in flux as companies find ways to migrate operations online, target new customer segments, adjust product focuses and alter revenue streams. But for traditional lenders, this display of flexibility isn’t always enough to qualify for funding.

On the contrary, banks are actually less likely to provide financing to a company with an unfamiliar or unproven business model, especially during times of economic recession, Honeycomb Credit Co-Founder and CEO George Cook recently told PYMNTS. “Whenever the economy starts to slow down, one of the very first things that both banks and online lenders pull back on is small business lending,” he said. “We saw that dramatically through the spring and summer.”

In this environment, however, there may be a greater opportunity for a relatively unknown strategy to connect small businesses to capital to blossom. Regulation Crowdfunding, which made its subtle entrance into the U.S. market several years ago, may now find the chance to make a bigger splash thanks to a convergence of pandemic-related factors.

Getting Creative

Whether it was a catering company shifting to a food truck model, a garment manufacturer switching to personal protective equipment (PPE) production or a brick-and-mortar store launching online sales for the first time, small businesses embraced the opportunity to rethink their business models and revenue streams — and needed funding to do so.

Big banks, however, pulled back from the small business segment, and while historically that left the opportunity of financing for small to medium-sized businesses (SMBs) to alternative FinTechs, events like Kabbage’s sale to American Express and OnDeck’s sale to Enova reflected alternative finance’s own scale back from the SMB lending market. Just as small businesses had to get creative about their operations, entrepreneurs had to get creative about their sources of capital.

“There is a lot of great commercial real estate available, a lot of great talent sitting on the sidelines, waiting to get back into small businesses,” said Cook. “The piece of the puzzle that’s missing to let businesses reopen or start expanding again, or to let entrepreneurs start new businesses is capital formation.”

Preserving Main Street

While Regulation Crowdfunding came into force in 2016, it remains relatively unknown among the small business community, Cook said. But the pandemic has driven new interest in the crowdfunding model as a result of these market disruptions. “It’s still a relatively modest piece of the puzzle,” he said. “There is a lot of education that goes on with what we’re doing, and making sure people are aware that this is an option for them.”

Struggles on Main Street have helped encourage businesses and individuals to explore the crowdfunding opportunity, however. Historically, one of the most attractive features of crowdfunding has been its ability to allow individuals to support local businesses with which they have personal relationships. At a time when consumers are seeing their favorite bars, restaurants and shops scrambling to keep their doors open, introducing an investment strategy that can keep those beloved companies afloat becomes even more enticing.

“People are deeply concerned about what their Main Street is going to look like post-pandemic,” Cook added, noting that he’s seen investors deciding to place their stimulus checks with their favorite local businesses. “This is a way to place that money, while simultaneously having a voice in what your community will look like post-pandemic.”

But awareness of Regulation Crowdfunding remains limited. So just as small businesses may find value in crowdsourcing their capital, the financing model itself can also benefit from crowdsourcing education and visibility. Small businesses embracing this strategy may put signs in windows or put announcements on social media — behavior that, Cook said, continues to drive exposure to companies like Honeycomb Credit in a much more accelerated fashion than before the coronavirus crisis hit.

According to Cook, it can be immediately powerful to see small businesses embrace the local support they receive through crowdfunding, then turn around and encourage their business peers to do the same. While much frustration among the cash-strapped SMB community remains, the pandemic may turn out to be the event that cracks open the small business crowdfunding opportunity.