SMALL BUSINESS

If you take the crowdfunding route, be sure to follow through on your promises.

Over the last several years crowdfunding has become an increasingly popular option for investors and entrepreneurs trying to raise capital — and public awareness — when launching or expanding small businesses.

Rather than approaching a single lender to make a significant loan to your business (which you most likely will need to guaranty personally), crowdfunding platforms give you a way to leverage your network of friends, family, social media connections and the public at large to obtain significant capital in small increments.

Collection effort

It’s a collective online effort that can expand your professional network and introduce your business to potential customers.

Crowdfunding for businesses comes in three primary forms:

• Rewards-based crowdfunding (such as Kickstarter and Indiegogo)

• Equity crowdfunding (such as CircleUp)

• Peer-to-peer lending (such as Lending Club)

With rewards-based crowdfunding, you only promise backers some sort of token incentive, and your risks are limited.

With equity crowdfunding, by contrast, you are giving up equity in a venture, and the risks can be substantial.

And with peer-to-peer lending, the business is taking on debt that it is legally obligated to pay back.

Equity crowdfunding and peer-to-peer lending are governed by a complicated web of federal and state securities laws, while rewards-based crowdfunding is generally exempt from those laws.

According to SCORE mentor and Houston entrepreneur Nick Tarte, rewards-based crowdfunding has rapidly become an accepted way to raise capital for small businesses.

‘Quite revolutionary’

“Traditionally, companies raised capital by issuing debt or equity,” Tarte says. “Rewards-based crowdfunding introduced a completely new alternative. The model has shown that the public is willing to contribute capital to worthy projects without any expectation of future profit, which is quite revolutionary.”

But be sure to pick the right platform for your rewards-based campaign. Remember, crowdfunding is a form of marketing, and you want to be where your customers are.

Tarte emphasizes that you should follow through on your promises. Watchdog groups and state and federal consumer protection bureaus have begun to focus attention on deceptive crowdfunding campaigns.

Tax issues

Don’t forget about taxes. Proceeds raised from rewards-based crowdfunding campaigns usually are treated as taxable income to the business. For this reason, Tarte advises businesses to consult with their tax advisers before embarking on crowdfunding campaigns.

Tarte will present the details of this increasingly popular but often misunderstood funding option at the SCORE workshop “Crowdfunding — An Alternative Source of Funding” from 10 a.m. to 1 p.m. on Dec. 5 at the Houston Community College Southeast Campus Workforce Building at 6815 Rustic.

To learn more and register for this workshop, go to www.houston.score.org/localworkshops.