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Sunday, 11 May 2014 22:00

Banks weigh their role in crowdfunding

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The recent CrowdCon events in Muskegon and Grand Rapids explored the role of crowdfunding in the capital continuum for startup businesses. Participants in one of the panel discussions were, from left, Kevin Romeo of Rhino Media, John Pridnia of Rehmann, Bill Franks of Smith Haughey Rice & Roegge and GVSU’s Kevin McCurren. The recent CrowdCon events in Muskegon and Grand Rapids explored the role of crowdfunding in the capital continuum for startup businesses. Participants in one of the panel discussions were, from left, Kevin Romeo of Rhino Media, John Pridnia of Rehmann, Bill Franks of Smith Haughey Rice & Roegge and GVSU’s Kevin McCurren. COURTESY PHOTO

As crowdfunding unfolds as an alternative for small businesses to raise startup funding, bankers are examining the role they can play in a new era of capital formation.

The small businesses that raise their initial capital through a successful crowdfunding campaign represent future customers for banks, said Mike Price, chairman and CEO of Mercantile Bank Corp. in Grand Rapids.

Bankers need to educate themselves about crowdfunding and begin reaching out to the small businesses that use it, Price said. While startup companies typically don’t qualify for a business loan because they lack revenue or hard assets or collateral, they will need services from banks — and eventually credit — once they get up and running.

Mercantile Bank “is just starting to look at” its potential role in crowdfunding, he said.

“Things are constantly evolving and as part of the financial services industry and as banks, we need to pay attention and go where people need us to go,” said Price, who views crowdfunding not as a potential source of competition but as a business opportunity.

“It may turn out to be a very valuable way to fund companies,” he said. “As bankers, we’re all for anything that helps businesses to get started. Down the line, we’re hoping these businesses that may be started by crowdfunding become viable small businesses and become part of a normal banking environment.”

One key area where banks are needed is in setting up escrow accounts that are required for a crowdfunding campaign. The escrow accounts hold the money invested in a company until the campaign is done. If the campaign is successful, the funds are forwarded to the company. If not, the money gets returned to the investors.

Speakers at the CrowdCon conferences in Muskegon and Grand Rapids said a relative lack of banks stepping forward to create the escrow accounts represents a stumbling block for small businesses that want to mount a campaign. They noted that just one bank in the state, Comerica Bank, is willing to create the escrow accounts needed for a crowdfunding campaign, although more are considering it.

One concern for risk-averse bankers is the fiduciary duty they have in creating escrow accounts for a crowdfunding campaign. They question what happens, for instance, if someone mounts a successful campaign and then “runs off” with their investors’ money. Price wonders whether the bank that created the escrow account and released the money has any liability.

“If there’s enough legal protection where the bank truly doesn’t have responsibility for making sure the people out there offering the securities are legit and etc., then you’re going to see the financial industry say, ‘Hey, we’re in,’” Price said.

Another possible deterrent: Escrow accounts are “very labor intensive” because of the record-keeping involved, said Rick DeVries, CEO of Monarch Community Bank in Coldwater. The record-keeping can become more intensive through a crowdfunding campaign that can conceivably attract hundreds of investors, some of whom may only put $100 or so into a deal but require the same amount of paperwork.

Banks also need to work out what kind of fee structures they would use for setting up and managing escrow accounts, said David Worthams, policy director for the Michigan Bankers Association. They can either opt to charge a flat fee or a percentage of the amount of money placed into the account, which in some cases could become a hefty sum and could prove cost-prohibitive for the small businesses raising capital.

Bankers overall are beginning to get educated about crowdfunding and how it may affect their business, Worthams said. Once they go through a learning curve, he anticipates that banks will gradually get involved and carve out a role.

“It will slowly come along, just like with any new trend in our industry,” said Worthams, who likens the scenario to the emergence of web banking in the 1990s and today’s deployment of mobile banking via smartphones.

“Folks are still trying to figure out where the market trends will be,” he said. “It’s a bit of an education process. As time goes on, you will look and see more and more banks do this sort of thing.”

One possibility that Monarch Community Bank “is very interested in exploring” is packaging business loans with a client’s crowdfunding campaign, DeVries said.

One startup, Tecumseh Brewing Co., planned to match the $175,000 it raised via the crowdfunding portal with $145,000 invested by friends and family and a $200,000 bank loan that was contingent on raising the remaining capital needed. The Southeast Michigan microbrewery is the first company to mount a crowdfunding campaign in the state under the Michigan Invests Locally Exemption (MILE) Act that was signed in December by Gov. Rick Snyder.

Bankers should embrace crowdfunding because of the potential to get capital into the hands of entrepreneurs who will also need business loans for startup businesses, DeVries said.

“This opens a portal of opportunity for the bank,” DeVries said. “This is a new day for investors, for small businesses and for financial institutions because it has the potential to link them together to do things that may otherwise (have been) left on the back of a napkin or envelope, or in someone’s garage.”

By working with a company that plans to pursue capital through crowdfunding and matching it with credit, bankers can also bolster a campaign’s appeal and its potential success by vetting the business plan beforehand.

“Banks are in the business of evaluating business plans,” DeVries said. “You’ll have the advantage of the banker doing an analysis on your business and kicking the tires. It’s no longer Joe going, ‘I’ve got a great idea.’ It’s, ‘I’ve got a great idea and the bank has already validated that by committing to a line of credit to go with the equity investment.’”

Read 5707 times Last modified on Friday, 09 May 2014 15:44

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