The strength of Portland’s economy is built upon the small business sector. Small employers make up 95 percent of Portland’s business base, and these businesses are built on ideas, savvy and sweat. But, it also takes money—plenty of money.

Cash doesn’t come easy to small businesses. Even financing via the Small Business Administration (SBA), which has a mission to support small business development, is unpredictable. The total number of loans and the total amount of money distributed via SBA-backed loans in the Portland area dropped more than 20 percent in early 2012 compared to the previous year. And to make matters worse, the SBA has proposed new rules that could allow big businesses into the program.

The difficult lending environment is one reason thousands of small businesses applied for the handful of grants offered by Chase Bank through its Mission: Small Business promotion—a program which in reality took advantage of small business owners and their clientele. The current business environment is also a driving force in the rise of crowdfunding.

Crowdfunding is a direct appeal from a business to its community, prospective customers, and/or concerned individuals for financial support. The foundation of this idea is nothing new, but the Internet has pushed crowdfunding into overdrive with websites like Kickstarter and Indiegogo, which have extended the potential reach of entrepreneurs seeking support way beyond their immediate community. These online platforms have also streamlined the process by appealing directly to potential customers and fans, which means that in today’s world, crowdfunding offers four distinct benefits that make it a better fundraising solution than applying for a small business loan.

 

Crowdfunding Has Higher Approval Rates Than Small Business Loans

Since 2009, more than $250 million have been raised by successful projects on Kickstarter. The Kickstarter model gives projects 60 days to secure pledges, and projects that reach or exceed their goal receive every dollar raised. Projects that fall short get nothing.

As with attempts to secure traditional venture capital or bank loans, the majority of projects launched on Kickstarter fall short. Only 44 percent of all Kickstarter projects are successfully funded. Of course, when you compare that to small business loan approval rates of 30 percent or less, that success rate looks pretty enticing.
 

The Application Process Is Actually Enjoyable

Applying for a loan is a royal pain. In contrast, the Kickstarter application process may include making a video, planning a launch party, chatting up potential customers, and generally talking about your project. It never includes pulling together every little detail of your financial history for the past decade. Basically, crowdfunding has achieved the impossible and managed to put the fun into business funding.

Portland has been a hotbed of crowdfunding projects from the beginning. AudioGlove, a Portland-based iPhone accessory maker, recently launched its first Kickstarter campaign.

According to AudioGlove founder Falco Freeman, the challenge of securing traditional venture capital and bank debt financing was a key reason he turned to Kickstarter to fund his company’s latest product.

“The amount of effort that goes into trying to get equity or debt financing is huge,” Freeman says. “It took me a lot of time to get a little bit of money through those routes.”
 

It's Not Just Funding, It's Marketing

The advice to pursue a crowdfunding campaign was suggested to Freeman by salespeople he met at the MacWorld trade show. In addition to the fundraising potential, they sold Freeman on using Kickstarter to test market his next product and promote the AudioGlove brand.

“We are building a new product,” Freeman explains. “The product is important but what we really need is to tell our story. Kickstarter is a way to leverage all our friends and our social networks to help get AudioGlove out there.”

This marketing potential is a unique upside for any crowdfunding campaign conducted via an online platform like Kickstarter or Indiegogo. Unlike a rejected loan application, even a failed crowdfunding campaign enjoys some exposure to potential customers. However, it is the chance for success and the momentum it creates that cement the appeal of crowdfunding.
 

Successful Campaigns Attract Attention From Traditional Channels

Ironically, the momentum created by a successful crowdfunding campaign may even attract investment from traditional channels.

Freeman’s business partner, JP Bauman, has worked in the venture capital field. According to Bauman, when considering consumer products like those offered by AudioGlove, “Investors want to see sales traction first.” Bauman continues, “That is what we are focusing on now and the Kickstarter campaign is a part of it.”

While crowdfunding, just like a business loan or venture capital, may not offer any guarantees, it does allow you to communicate with your community. And, if you didn't have the right details for a small business loan the first time around, crowdfunding may just help you realize what you were lacking as you interact with and learn from the people who are interested in and can support your business.

Have you supported a project on a crowdfunding site like Kickstarter? What hooked you on supporting a crowdfunded project or creating one?