Sara Routhier, Managing Editor of Features and Outreach, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming worl...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Mar 9, 2012

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In this tough economic climate, small businesses and those interested in starting a business are finding it increasingly more difficult to qualify for business loans. When a hopeful business owner is unable to come by the necessary capital needed to lift his or her dream off the ground, an idea is lost and potential jobs dissipate into nothingness. Not only is an individual or family affected, but society as a whole loses out on opportunities that “could have been.”

Kristie Arslan, president of the National Association for the Self-Employed, explained to a Yahoo! Small Business Advisor that small business owners “don’t need large sums to start or grow, but traditional lending institutions don’t look at them as moneymakers.” Since banks don’t see small businesses as very profitable, they withhold personal business loans and move on to the next applicant.

Within the last few years, however, artists and entrepreneurs have taken this battle to the internet and sought help from the online community. When big banks and credit unions refuse these people business loans, some have pursued a more creative means of raising money called “crowdfunding.”

Brothers Helping Brothers

Crowdfunding is a growing online trend in which people can post their ideas on various websites along with a detailed plan on how they hope to pursue their dream, and readers can volunteer their money in the form of a personal loan. Websites such as Kickstarter.com and IndieGoGo have proven to be enormous platforms for spurring dreams in the right direction.

These services are particularly useful when banks shun aspiring business owners and turn all applications for personal loans down.

The problem with crowdfunding, however, is that contributions are purely donations, not technical small business loans. Crowdfunding is based purely on individuals’ willingness to donate their hard-earned cash for no reason other than to see somebody else’s dream fulfilled. The humanitarian aspect of this relationship is beautiful, but unfortunately it’s not the most practical.

Whether a donator gives $1 or $1,000, they must concede to the fact that their money will go to somebody else and likely grant themselves little to no return at all. This is because it is illegal in the United States to sell shares to unaccredited investors. Crowdfunding, as of now, is about as unaccredited as something can be.

The Federal Government May Help

But the government may soon change that. There have been recent talks of loosening the rules tied to crowdfunding and possibly allowing donators to actually invest in aspiring companies instead of merely forwarding them money.

Tim Rowe, who founded the Cambridge Innovation Center, told the Senate that by relaxing crowdfunding regulation, “We have the potential to really radically change the system by which we create new companies in this country.”

In his attempt to persuade the Senate to get behind and better incentivize crowdfunding, he cited an argument made by Amy Cortese, author of a local investment book called Locavesting. “If Americans put 1 percent of their savings in a business in their town instead of in their 401k, that would create a pool of money that is 10 times greater than all the venture capital we invest every year in this country—a pool of capital that is half as big as all outstanding small business loans.”

Let’s Turn the World into Our Board Room

The brilliant thing about crowdfunding is that truly exemplifies capitalism, lending credence to arguably one of the most definitive aspects of American culture. Those with a dream or idea can take it to the online community, establish a business plan, and present it in a professional manner. If the public accepts it, they will back it. If they believe it to be hastily put together and without much thought, then those ideas will be weeded out.

People across the world will turn into small businesses board members, and invest their own money in these new technologically-inspired small business loans.

They are also empowered to put their money into projects or ideas they believe in. As Arslan asks,  “If you’re going to take a risk, why not take a risk on a local business to create a better economy for your neighborhood?”