The Small Business Administration (SBA) of the United States regulates several policies and programs to support and nurture the growth and development for the small businesses in the country.
The programs listed in the Office of Economic Research December 2015 report (PDF) include opportunities starting with loan guarantees and venture capital programs and continuing to peer-to-peer and equity based crowdfunding in order to facilitate small business access to capital.
Access to capital for small businesses has been seen as a deciding factor for most business growth. President Obama who has been supporting the program states that additional resources should be made available to small businesses to help them acquire necessary capital to commence or expand operations.
During the 111th Congress, the American Recovery and Reinvestment Act of 2009 (ARRA) provided the SBA an additional $730 million.
Furthermore, the Small Business Jobs Act of 2010 authorized an additional $30 Billion towards the Small Business Lending Fund in order to encourage small banks to provide loans. During the 112th and 113th Congress, several bills were introduced to facilitate small businesses access to capital through the SBA. The Consolidated Appropriations Act, 2014 increased the annual authorization amount of the Small Business Investment Company venture capital program to $4 billion.
For small businesses that may not have access or qualify for this funding may turn to private and alternative funding sources in the forms of peer-to-peer lending (PDF) and equity based crowdfunding. P2P business loans are essentially fixed-rate term loans and were introduced to connect investors and small businesses owners online to facilitate funding for the latter. On the other hand, through the peer-to-peer lending websites, prospective borrowers can apply for credit and receive a credit rating. They can also post to a listing that potential investors can view. Investors have the option to choose a particular business which is repaid periodically till the loan matures. It has been observed that although the interest rates for the peer-to-peer lending tend to be higher than traditional banks, the credit application process is less cumbersome, and it is more relevant in the post-recession credit market, as a result of which it has gained tremendous popularity over the past decade.
These are a great alternative where traditional financial institutions fail to lend. P2P lending has been seen to cut down on information and search costs substantially. Owing to anonymity between the lenders and investors, P2P lending does away with discrimination of any sort and is unbiased in a way.
According to an estimate from pWc (PDF), the P2P market could reach a whopping $150 billion or more by 2025. P2P lending is regulated at the Federal and State Levels under various statutes. Another major avenue that opened as a result of the most recent SBA report was the crowdfunding. Crowdfunding uses social media platforms to enable users to make investments in a wide range of ventures and projects. The social media platforms facilitate direct interaction between small business owners and investors.
Currently, there are primarily three kinds of private funding sources which are crowdfunding, namely, reward, peer-to-peer and equity which take place in these social media platforms. Crowdfunding is now estimated to be worth $3-5 billion worldwide. Equity-based crowdfunding was started as a part of the Jumpstart Our Business Startups Act (P.L. 112-106) to encourage small businesses to raise capital through securities offerings using the Internet. While globally only 5 percent of all crowdfunding is equity-based, the trend shows a positive shift.
The steady decline in the availability of small loans through conventional channels has made alternative funding sources efficient alternative for small businesses. Another reason why these alternative funding sources are gaining popularity because most of them do not require any sort of collateral to receive funds and also reduces one’s chances of bankruptcy because nothing is really owed in the initial stages which is advantageous for most small businesses.