Regulation Enables New Ways Of Raising Money
Growth-oriented small businesses are everywhere, but funding for them is not. New and seasonal businesses and businesses with uneven cash flow have a hard time raising money. It is especially hard for women- and minority-owned firms to raise money. These companies make up a growing share of small businesses. Undercapitalized companies have lower sales and profits, generate fewer jobs and are more likely to fail.
Regulation A+ (Reg A+) of JOBS Act was approved in June 2015 to help entrepreneurs and small business owners raise money from average and wealthy Americans. The majority of companies have used this legislation to raise money directly via equity offerings. A few have created innovative financing companies that use the law to raise money to lend to other businesses. “If you own an equity piece of a company, it might take years to get a return. You have to wait for a company to exit, be acquired or do an IPO” said Sally Outlaw, president and founder of Worthy Financial. “We created a debt product to deliver a financial return right away.”
A Win-Win For Main Street Investors And Small Businesses
Not only does Worthy Financial provide startups and small businesses with the capital they need to fuel growth but they also offer a way for Main Street investors to access higher-yielding private lending opportunities. That’s a privilege previously accessible only to accredited investors.
You can invest as little as $10 in a 5% interest-earning, three-year bond. However, if you need the money sooner, early withdrawal is not penalized. The interest rate is prorated to the amount of time invested. To minimize the risk to average Americans, they cannot invest greater than 10% of their annual income or 10% of their net worth, excluding their homes.
The money raised through Worthy bonds provides asset-backed loans to growing small businesses nationwide. Business owners who are unable to secure funding from a bank often find it is easier to qualify for asset-based financing because the major requirement is to have assets — not cash flow. To manage loans, Worthy Financial created a separate division called Worthy Lending.
Using New Regulation Is Complicated But Perseverance Pays Off
The biggest obstacle is that legislation is open to interpretation and it can take time to sort through. “Proving that we were both an eligible issuer and that we were using the bond proceeds to invest in an eligible security took time,” said Outlaw. It took about nine months to file with the Securities Exchange Commission (SEC), navigate the eligibility issues and qualify. It took another couple of months to get approved in the eight states that have additional requirements.
Walking The Walk And Talking The Talk
Outlaw understands first-hand the difficulty of raising money. As a scaling fintech company, equity financing was the right kind of funding for Worthy Financial. At the pre-seed stage, she invested in the company herself as did business colleagues. At the seed stage, angel investors and a venture capital firm invested. The VC, The Jump Fund, enables accredited women investors to seed and grow female-led ventures in the Southeast.
Since raising equity financing takes time, Outlaw wanted to have more control of the outcome. To supplement the raise and walk the walk, she did an investment crowdfunding raise, using Regulation Crowdfunding (Reg CF) on the StartEngine platform. “I would be the driver behind the campaign,” she said. She’s been part of the investment crowdfunding community since nearly the beginning and is dedicated to community capital. “I really love the idea of having our customers own a piece of the company.” Her crowdfunding raise surpassed its goal.
How will you tap new sources of funding?
