Crowdfunding Enters Lucrative World of Auto Finance
By Tannette Johnson-Elie
Crowdfunding fundamentally has changed the way entrepreneurs raise money for a new business or a creative project and now it has emerged on a new frontier: the lucrative world of auto finance.
Traditionally, auto dealership credit facilities made loans to individual consumers. But as credit became harder to access after the 2009 financial crisis, many such businesses could no longer get traditional financing and consequently, were unable to keep up with the demand for consumer loans. That is, until an auto finance executive from Milwaukee decided to step up and solve the problem.
David Braeger has brought crowdfunding onto the auto finance scene with the recent launch of Braeger Auto Finance Group. It is believed to be the first business model in the U.S. driven by investors’ funds to support auto dealership credit facilities.
Crowdfunding is the practice of funding a project, objective or enterprise by raising small sums of money from a large number of people, typically via the Internet.
Investment in auto finance historically has been open only to individual institutions such as hedge funds, credit unions and institutional investors. Braeger is allowing individual investors in on the action of the $100-to-$200 billion auto finance sector.
Braeger utilizes VroomBank.com as its Internet investment portal. Interested (accredited) investors may access the site, set up an account and select a fixed investment: a three, four, or five year note, yielding 7%, 8% or 9% respectively. Investors receive quarterly interest payments.
“Web 2.0 is changing the world of financing,’ says Braeger, a former investment banker who comes from a fourth-generation, auto dealership family. “It’s helping the small business owner who couldn’t get financing from a bank and it’s making it less expensive to get the money they need.”
Most traditional lending sources make loans to individuals. But Braeger believes his auto finance company may be the only crowdfunded model in the U.S. that makes loans to independent finance companies that, in turn, loan money to the consumers who purchase the vehicles.
“We are helping to connect car buyers such as the mother that has to wake up at 3:00 a.m. to take her kids to school on two buses and then take another few buses to get to work,” said Braeger.
Braeger believes his business model has significant advantages over traditional crowdfunding.
“We are investing in multi-million dollar credit facilities with thousands of loans in portfolios in which tremendous due-diligence has been done by us and our partners,” Braeger said.
Sherwood Neiss, principal at Miami-based Crowdfund Capital Advisors LLC, expects to see more companies like Braeger’s stepping up to fill the void left by the recent financial crisis.
“It’s incredibly innovative,” says Neiss. “If he (Braeger) can get it right, he will have more business than he can handle because there will be auto dealers coming to him for solutions who wouldn’t find them elsewhere.”
The timing is right for Braeger to engage investors in his unique crowdfunded finance model, Neiss said.
A rule change adopted by the US Securities and Exchange Commission last year eliminates prohibition against general solicitations and advertising for certain securities, making it easier for start-ups and entrepreneurs to reach large numbers of investors online. The proposal was issued in October as a mandate in the 2012 Jumpstart Our Business Startups (JOBS) Act.
Critics argue that relaxing investment regulations will invite get-rich-quick scam artists to take advantage of a larger pool of investors via the Internet, while advocates contend that the “wisdom of the crowd’ will weed out such opportunists.
To date, Braeger says his company has raised approximately $6 million and this has come in just one year.
So, you may be wondering if crowdfunding is right for you. Braeger and Neiss offered the following advice to help you decide:
Follow your passion.
If you’re passionate and enthusiastic about your project, you’ll get more supporters, Braeger said. “I love cars. I come from a 90-year-old dealer family,” he said. “It’s in my blood.”
Find a problem and create a business that can help solve it.
“In a young company, you can’t look for the pie-in-the sky, the money,” Braeger said. “You have to look for the resolution. If you’re solving a problem, the money will come. You will have a successful business.”
Fine-tune your social networks
Raising money from your loyal base of fans can be one of the most challenging aspects of crowdfunding, but with planning, it can be accomplished, says Neiss. Social media now makes it possible for people and their ideas to go viral virtually overnight without spending money on a traditional marketing campaign.
“Start fine-tuning your Facebook followers. Build out your LinkedIn profile. Invite people to follow you on Twitter. Leverage pictures on Pinterest,” he said. “Build out your business case in a way that’s easy to digest and understand so that people will become engaged around your solution. “