The Billion-Dollar Question: How to fill Belize’s SME Credit Gap? Part 6

The last few installments in this series on alternative financing approaches that are useful considerations in bridging the Small-Medium-sized Enterprises (SME)’s credit gap had focused on the usefulness of secured transaction registries (STRs), and how these provide increased protections for creditors using movable assets as collateral. However, true to the nature of this series, the goal is to show the gamut options that are also available to SMEs.

Beyond asset-based lending, venture capital, angel investors, or even the more conventional public stock (capital) market structures, there has been an emerging trend in a relatively new and innovative form of financing mechanism commonly referred to as Equity Crowdfunding (or Crowdfund investing).

Now, it is useful to quickly define what is meant by Equity Crowdfunding (EC). The Organization of Economic Corporation and Development (OECD), in its report “New Approaches to SME and Entrepreneurship Financing: Broadening the Range of Instruments” described EC as follows:
“Equity Crowdfunding can provide for a complement or substitute of seed financing for entrepreneurial ventures and start-ups that have difficulties in raising capital from traditional sources, like bank loans, venture capital, business angels and also public programmes, because they are too innovative to be understood, to complex, too risky or simply because business plans are poorly presented”.

The idea is fairly simply. EC operates via a Crowdfunding Infrastructure which is usually an online website (also referred to as a Funding Portal). Examples of such websites include those by EC firms such as SEEDRS in the United Kingdom, CIRCLE UP or SeedInvest of the United States. In the simplest definition, an entrepreneur—after having been vetted by the investment platform—would have their business details posted on the websites of companies like those mentioned above, and everyone from the average citizen to professional investors would be able to commit funds to the business of their choice. Hence the name “Crowdfunding”, as the business literally is able to source funds from its “community group(s)” that supports that type of business. A useful example would be the community of conservationists funding eco-friendly and innovative businesses via the funding portals.

The financial structures have taken on creative expressions over the last few years, however, as the name implies, a common feature of EC is that investors—who invest within the scope and limits of relevant laws—would gain equity or shares in the company. Consequently, keeping with the eco-friendly business example, the investors are often likely to double as customers and champions for the business within their respective “community groups” as the community itself has a stake in the businesses success from both a financial and “advocacy” standpoint.
InfoDev, a World Bank Group program that supports high-growth entrepreneurs in developing economies, described the EC outlook up 2025 thus:

“With support from governments and development organizations, Crowdfunding could become a useful tool in the developing world as well. … Developing economies have the potential to drive growth by employing Crowdfunding to leapfrog the traditional capital market structures and financial regulatory regimes of the developed world.” InfoDev estimated that developing country households would be able to cumulatively deploy up to US$96 billion a year by 2025”. Between 2013 and 2014, Massolution (2015) reported that the EC industry grew from US$6.1 billion to US $16.2 billion, representing a more than 160% increase within one year. The growth is, yet again, a clear indication of not only the growth potential of this financing option, but another clear reflection of the seriousness of the credit gap that exists globally.

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