Crowdfunding Can Help Retailers if PPP Can’t
Retailers are facing an uphill battle. The original Paycheck Protection Program (PPP) reached its $349 million cap in less than two weeks, and the replenished program has caused chaos, leaving many retailers scrambling to find ways to create revenue and survive during this downturn. For those that were lucky enough to have secured a loan, there are still huge questions left unanswered, such as when the money will come and how much will they receive?
U.S. retail sales plummeted 8.7 percent in March, according to data available from the Census Bureau, the worst monthly decline on record. With a nationwide shutdown on non-essential stores, the retail industry has been one of the most heavily impacted, as Americans continue to pull back on discretionary purchases. Combine that with the fact that many brick-and-mortar retail locations were already in jeopardy pre-pandemic, and we’ve got a real dilemma on our hands.
Some retailers have been able to stay afloat by adjusting to this new normal through pivoting to online-only business models, selling gift cards, drastically cutting costs, and furloughing workers. However, with a drastic drop in revenue, no clear end in sight, and the possibility that this could change consumer spending habits for good, retailers are bracing for financial hardships that could mean the end indefinitely.
However, there's an alternative method to traditional lending options that can help retailers raise capital during this uncertain time: equity crowdfunding.
With Regulation Crowdfunding (Reg CF), retailers can create a lifeline for their business by rallying their fans, loyal customers, local community members, family and friends to invest in their business directly. Crowdfunding allows them to provide their customers and biggest supporters with an opportunity to invest in their business and share in its success.
Unlike traditional bank loans, crowdfunding allows retailers to dictate both the amount of capital they can raise and the terms of their fundraising efforts. Retailers can pick from three different offerings available through equity crowdfunding: equity, debt, and revenue sharing.
- Equity: This is the traditional venture capital model where retailers offer investors a piece of their company in exchange for capital. This option is ideally suited for a startup or company that intends to grow, expand, or franchise. It’s less ideal for a traditional brick-and-mortar business.
- Debt: This resembles a simple standard loan, where retailers have flexibility in the interest rate, but will need to keep it competitive to attract investors.
- Revenue Share: Investors would receive a percentage of a retailer’s revenues until the total amount (principal plus a multiple) is paid off. This option features payments at set intervals (monthly, quarterly, yearly) that scales payments as revenue increases or decreases.
Retail stores play an important role in our society, providing communities with brick-and-mortar locations to purchase their favorite products. Despite the uncertainties COVID-19 brings to the market, there's still light at the end of the tunnel.
Equity crowdfunding allows retailers to maintain control of their business, opens the gates to new types of investors, and provide their networks with an opportunity to help them during this unsure time and eventually share in their success when this is all over. For those that need access to capital to keep their operations running and employees paid, equity crowdfunding should be considered as an effective way to raise capital during this time.
Ben DiScipio is co-founder and chief strategy officer of equity crowdfunding portal Fundopolis.