Summertime in South Louisiana means 100 degree heat accompanied by 1000% humidity (relatively speaking). Now, in case you’ve never been to “Bayou Country”, this equates to an immediate sweat storm upon stepping outside the door.
In true southern speak… it’s bad y’all.
Accordingly, all good southern mothers instinctively know that you must limit outside playtime in the heat of the day lest you risk your kids melting to the pavement. Unfortunately, limited playtime has a direct correlation with frequent, repeated use of the words “I’m bored” which I’m certain leads to insanity in parents. So, after a month of the dreaded “there’s nothing to do” daily ritual, I decided to load up on up the car and head down to the Florida panhandle for a long beach weekend, stopping along the way for some much need retail therapy.
As we entered the store, my son ran to check out the new Salt Life shirts, my daughter escaped to the swimsuit section, and I momentarily enjoyed the solitude. My solace was quickly disturbed when a man handing out free pens and a car decals approached me.
Before I could kindly say “I’m not interested”, the man’s story caught my attention. His son Trent, like many southern boys at the prime age of 16, has a love of trucks and fishing. His favorite things led him to design a distinctive logo melding the sailfish with the Gulf Coast states. He quickly began printing the logo on decals for friends as a hobby. When the demand for Trent’s decals began outweighing the supply, he realized the need for his product, and the 16 year old entrepreneur launched Southern Shores Merchandising Co. With the help of his father, Trent now offers his “Live the Shore Life” apparel, decal, and merchandise via an online store and in a number of retail outlets.
Reflecting later on my conversation with this proud father, I wondered if this story would have turned out the same if Trent didn’t have the backing of his family, and he had to conform to standard borrowing practices like most small business owners. I reckon the conversation would have gone something like this:
New Business Owner: I’d like to get a loan to fund my business.
Lender: Tell me about yourself and your business.
New Business Owner: Well, I’ve never owned a business before, and I’m short on funds, but my friends really like the new logo I’ve created and are willing to buy merchandise from me if I can get the capital to start creating shirts and decals. This is my dream!
Lender: Sorry kid. Strict lending practices won’t let me take the risk on you. Good luck with your dream.
Enter crowd funding.
For the small businesses or start-ups that don’t qualify for traditional bank lending programs, crowd funding offers alternative funding sources to bridge the gap. With many financial institutions struggling to increase their loan to deposit ratios, what impact will this have on bank lending, and why should the banking industry look upon crowd funding as an opportunity versus a threat?
Primarily, crowd funding is an opportunity to revolutionize the way your community bank or credit union operates. It’s also the chance to get in on the ground floor of a trend that’s well on its way to becoming a global phenomenon.
From the borrower’s side of the equation, crowd funding has a lot going for it. Peer-to-peer lending (P2P) is making more money available to more people for more purposes. A local financial institution may hesitate to bankroll the kid who wants to put his fish logo on t-shirts because he’s young and inexperienced. Crowd-funding platforms would likely embrace him, even if he needs only a couple thousand dollars.
Crowd funding is also democratizing a form of investment that until now was accessible only to high-income individuals and corporations. Investors with relatively low amounts of funds at their disposal can delve into crowd funding as a way to invest in large-scale endeavors by pooling their resources – as part of the “crowd.”
Community institutions, however, are more cognizant of the risks. There are reasons they don’t want to underwrite a personal loan of a few thousand dollars, or a business loan for a start-up with an unproven concept or management team. The risks are high and the returns often low on this type of business. Nevertheless, there’s still room at the crowd-funding table for community banks and credit unions.
In fact, financial institutions should quickly grab a seat because crowd funding isn’t going away. Consider these points from the 2015 Crowdfunding Industry Report by Massolution:
- Globally, crowd funding grew by 167 percent in 2014, topping $16 billion.
- The industry will likely double again 2015, reaching $34.4 billion.
- In North America, crowd funding grew by 145% in 2014.
- Lending-based crowd funding was the lion’s share of the industry at $11.08 billion.
- Report data was based on the analysis of 1,250 active crowd-funding platforms around the world.
Smart community banks and credit unions will leverage crowd-funding opportunities to their advantage. Blogging for Banking Exchange, Chris Nichols, chief strategy officer at CenterState Bank Central Florida, offers some insight into how this can happen:
- Work with a crowd-funding platform to fund riskier projects that have higher potential returns.
- Partner with a crowd-funding platform to provide non-credit services, such as cash management, for borrowers considered too risky for traditional lending platforms. As borrowers develop a stronger standing, migrate their business from the crowd to the bank.
- Co-invest with the crowd.
Nichols goes on to say that “the future looks brighter with crowd funding than without it.” Admittedly, getting into this riskier, more profitable game will require financial institutions to make some organizational changes to accommodate crowd-funding opportunities. Improving your ability to compete in a sub-prime niche will be key (check out our on demand webinar called “How Best Run Community Banks Maximize ROAA & Efficiency” to learn how some top-performing community banks are doing just that).
Whether financial institutions will take advantage of outlying opportunities provided by crowd funding remains to be seen. However, banks and credit unions should at least explore the role they can play in the crowd funding arena to support small business. And, if you’re looking for support to tap into this market, just liken it to a Louisiana summer. The humidity may be uncomfortable, and you will need to be cautious of the heat, but you can’t let it stop you from stepping outside the door to broaden your horizon.