The Good, Bad and Ugly of Business Funding

That’s Business

Every business sector has its flaws, and finance is no exception. There’s always a catch when you’re dealing with money, and at FaaSfunds, we’re here to make sure it’s not a Catch-22. With so much to understand and be careful of dealing with business funding, we’ve made a guide to help you make smart financial decisions.

There will never be free money. Even if you apply for grants or seek investments from angel funds, there’s always going to be requirements and paybacks that not everyone can meet. Loans aren’t free money, either, and there are several things you should be aware of before you apply. Since money is a business itself, lenders are out to make a profit off of your debt, so it’s good to be aware of their practices.

According to Harvard Business School, small businesses are the driving force of American job creation. In the 15 years leading up to the 2010 census, small and new firms were responsible for creating two out of every three new jobs. Small businesses are obviously vital to the American economy, so why is having one so hard? In order to have a successful small business, it’s important to understand every aspect of your finances and maintain your debt. Here, we’ll explain the good and bad sides to maintaining business finances and getting funding.

Business Debt

Debt isn’t technically a bad thing, as long as you know how to use it. According to the Federal Reserves Small Busines Credit Report for 2018, 70% of businesses have outstanding debt. But the thing is, lenders are going to let you acquire new debt if they trust you to pay them back, and the only way to do that is to have a proven track record or repayment.  

The Bad News

According to Steve Goodrich, managing partner of North End Financial, in an article for Fundera, the single best predictor for paying off debt is the number of years a company has been in business. Roughly 50% of companies survive past the five-year mark, and if they can make it past that, it’s a pretty good indicator that they’ll succeed in the long run. After that five year mark, it’s significantly easier to get funding. 

But what about in the meantime? That’s the catch with getting a business loan – if you’re a new business and don’t have a track record yet, it’s a lot harder to get a loan. The odds are seemingly stacked because already established businesses that turn a profit are usually the only ones likely to get funding. Startups are hard to get business funding because there’s no way to evaluate them.

This is where personal credit comes in. Often, when a business is just starting, owners and founders have to get funding based on their personal credit score. This can be good and bad. If you’re just starting a business, it’s a good idea to try and build up your personal credit first.

The Good News

The good thing about trying to find business funding as a new business is that there are options, albeit they’re rarer. How does any business get started, then, if it’s so hard? The answer lies in raising capital. For more technology/online-based, scalable businesses, they’ll often go to venture capitalists and investment funds. For more concrete, community-based businesses, options can be more limited.

Grants are hard to acquire, but finding investors can be a little easier if you have a solid business plan. There are sites specific for pledge crowdfunding (Kickstarter, Indiegogo), and even newer sites popping up for something called equity crowdfunding – where accredited (and according to some state laws, non-accredited) investors can give money to companies and instead of receiving a product or swag, they receive a stake in the business.

There are also loans structured specifically for startups. The Small Business Administration has a microloan program, which gives small loan amounts to budding businesses at very reasonable rates.

If you’re looking for a traditional loan, or feel it would work best, people were the least dissatisfied in 2018 getting financing from a small bank, according to the Federal Reserve. Of those who got small bank loans last year, only 46% reported facing challenges, as opposed to 53% with large bank loans, and 63% with online lenders. 

Within those numbers, however, the reasons for being dissatisfied varied. The most cited issues with small banks were their waiting times for approval and funding, and the most cited issue with online lenders were their high-interest rates and unfavorable repayment terms. 

But then there’s the logistics of getting business funding, like how much of a credit risk your business is. Small banks only approve 47% of those considered “high credit risk,” as opposed to 76% for online lenders.

These are all the things you’ll have to take into account when trying to get business funding. If you have bad or little business credit, an online lender might be your best option, even though they have higher interest rates.

Do Lenders Want You To Succeed? 

The world of finance isn’t really structured to help small businesses succeed. It’s more or less structured to keep big businesses successful. Just remember, lending is a business too. If you can’t pay or keep up with their terms, they’ll do whatever they can to get money from you. If you’re starting a new business, there are some things you should keep in mind that will not only set you up for success but also help you make a case to get funded. 

Tech market intelligence platform CB Insights compiled a list of the top reasons that startup businesses don’t make it. At the top of the list was a lack of market need – of the failed businesses included in the research, 42% of them failed because they didn’t fill a market void, or there wasn’t a demand for their product. It’s important to analyze the market you’re looking to enter – whether it be a tech market or a retail market – to make sure that there’s an actual need for your product. You wouldn’t make a lemonade stand in the middle of the winter in Minnesota, would you?

The next most popular reason businesses fail, unsurprisingly, was running out of cash. 29% of failed startups cited this as the reason they didn’t make it. Next came not having the right team, getting outcompeted, and then finally, pricing and cost issues. Most businesses surveyed were within tech-related fields, but even if you’re not a tech startup, there are valuable lessons to be learned from the failure of other businesses.

So What Does All This Mean?

When you want to get your business funded, there are a lot of obstacles you’ll have to face. That’s the ugly side of business financing – it’s like a game of blackjack, and you have to play your cards right in order to guarantee you’ll come out of it successfully. Some of it is luck, and a lot of it is skill.

If you want help, though, that’s why FaaSfunds is here. If you’re starting a business and want to build your business credit, or you’re looking for funding options, or you’ve been around for a while and want to know what your next move should be – FaaSfunds is your go-to business finance tracker and funding advisor. We’ll match you up with the funding that best fits your business, no matter your credit score or financial history. If you want to know what FaaSfunds can do for you, click the button below to get started today.

What Does the FaaSmatch Algorithm Do?

We keep mentioning our “FaaSmatch” algorithm – it’s how we match your business to the best lending options out there. But how exactly does it work? Let’s break it down.

The “FaaS” in FaaSmatch stands for “Financing as a Service,” which is what FaaSfunds does. We’re taking the broker out of getting a loan, and making it easier for you and your business to find the lending options you need. We’re a business-to-business service, and our finance-matching is the service we offer.

FaaSmatch is an algorithm because it uses software analytics to automatically sort through your financial information and compare it to our lending marketplace. This way, based on data points, it can match you up with the lender that will give you the lowest rates and best terms, along with the best chance for approval. By using this automated process, you can instantly see how different lending options compare, and you can understand which one will work best for your business.

Let’s Break it Down

What is an algorithm? By definition, it’s a process or set of rules to be followed in calculations and other problem-solving operations. They’re created by constructing a set of directions, much like a map, that can be reduced to three logical operations – “and,” “or,” and “not.” You can use algorithms to solve a Rubix Cube, or you can use algorithms to run search engines.  Algorithms are everywhere. They’ve become a colloquialism. They determine what’s advertised to us and they determine what shows up in our news feeds. FaaSfund’s algorithm is different. We saw the need for an easier way to find lending options, so we spent countless hours dedicated to doing just that.

Our algorithm, called “FaaSmatch,” is a set of programmed commands that looks at financial information and compares it to data from lenders. It looks at credit and other financial factors and analyzes it alongside compiled information from our lenders to determine which loan and lending options make the most sense for each business’s financial situation.

The Goal of the Algorithm

Stefan Friend, head of product development at FaaSfunds, explains that the goal of the FaaSfunds algorithm is to help users make informed decisions.

“It’s a simple way to match a business’s credit profile holistically to the right financial products for them,”  said Friend. “Using a proprietary algorithm, we take a close look at a business credit profile and score and weigh them against the criteria for certain financial products.”

This makes the funding process quick and easy, and without the need for a broker or extensive paperwork. The FaaSfunds algorithm automates the funding process so the business owner is in charge of their own funding, but FaaSfunds lets them see what their best option is.

“Ultimately what this does is help them have a better view of the best product for their business,” said Friend, “and allows them to have a firmer grasp on their business’s financial future.”

Take a look at FaaSfunds today and see just how well the FaaSmatch algorithm works for you.

The Top 4 Reasons Businesses are Denied Funding

If you’re frustrated about your business being denied funding, you’re not the only one. According to the Federal Reserve, only 47% of small businesses received the amount of funding they applied for last year. Of the 53% that are denied funding, 32% received some of what they needed, and 22% received none.

Make no mistake, funds are not unlimited and lenders can only approve so many business loans. There are, however, fundamental reasons that businesses get declined. At FaaSfunds, we’re here to break down those reasons and help your business get approved.  Here are our top four reasons why businesses get denied funding.

Low Business Credit

According to the Federal Reserve, businesses considered a “high credit risk” had the most financing shortfalls. In 2018, 91% of companies with lower credit scores (usually, under 620) that applied for less than $250,000 did not get the full amount of financing they sought. Lenders are less-inclined to fund high credit risks because they don’t have the personal guarantee of repayment. Meaning that since your credit signifies your history with paying off debts, a lower score often means – to lenders – that your repayment history hasn’t been stellar.

If you have bad credit and have been denied funding, there are several alternative ways of getting funded – some online lenders cater to businesses with low credit, and options like merchant cash advances and invoice financing sometimes don’t look at business credit. The interest rates are often higher and the terms shorter, but if you can manage to prove with these alternative funding options that you’re capable of paying off debts, it can improve your credit and your chances of being approved in the future.

Not Turning Profit

In 2018, 67% of businesses that broke-even or weren’t profitable were denied funding. Being profitable can be a huge determinant for lenders – they want to see that you’re bringing in enough money to pay them back. Forbe’s calls this “quality of cash flow.” They describe that “having high-quality earnings means a company’s financial statements show stable, persistent and predictable earnings that are related to the core business.”

It’s not always possible to be a profitable business right-away, so it’s important to show that you’re capable of paying off debts. If you’re not making a profit, you might have to provide significant collateral or prove that you make enough revenue to cover the loan cost. It’s also an option to add a personal guarantor to the loan, saying that should you default, they’ll pick up payments.  

Geography

The same Federal Reserve study found that geography can also influence if a business gets funded or not. 56% of businesses located in urban areas did not receive the funding they asked for, as opposed to 45% in more rural areas. This fact might sound a little odd, considering that urban areas have more people, but actually, rural businesses out-perform urban ones.

The reason behind this is because urban businesses are met with more competition, higher operating costs and higher taxes. It costs significantly more for a business in New York City to find and pay labor than a business in Albemarle, N.C. For more perspective, the average rent in NYC is $3519/month, while the average rent in Albemarle is $564/month. These lower expenses for rural businesses easily translate to profits. Rural businesses also tend to be older and have predictable expenses, and well-established businesses are more likely to receive funding. Along with these aspects, the fact of the matter is that it’s a lot easier to get funding from a small, rural bank than it is from a national bank.

On a less statistically significant level, according to the same survey, the Federal Reserve found that companies in New England had the hardest time getting funded while those in the East South Central (Alabama, Kentucky, Mississippi and Tennessee) had the easiest time. This is on par with the rural vs. urban divided in business funding. New England is more developed and has a population density of about 210 people per square mile, while the East South Central has a population density of about 98 people per square mile.

Business Age

Most businesses younger than five years old haven’t really established credit, and that explains why according to Federal Reserve data, around 63% of them don’t get the funding they ask for. These businesses are considered startup firms and don’t often have enough established business credit to qualify for funding.

Fear not, though, because there are a lot of options for startups to get the financing they need. Certain crowdfunding opportunities can help raise money via small investments, while the SBA has a microloan program designed for startups. You can also receive grants from companies and investors.

The Big Picture

Often, one single factor isn’t going to determine if you’ll get denied funding Each lender has different parameters for approval, and if you get denied by one, it doesn’t mean you’ll get denied by all of them. Lenders look at a variety of aspects and take many things into account, so don’t get discouraged if you fit a few of the profiles mentioned above. There are hundreds of funding options out there, and FaaSfunds is here to help you understand why you got declined, and look at your business finances and help you figure out your path to approval. Check us out today.

Need to Know: Business Term Loans

Term loans are about as traditional, and popular, as it gets in terms of business funding. If, as an individual, you have student loans or a mortgage, then you have a term loan. As a business, term loans work along these same lines. The stipulations – requirements, interest rates, and terms – vary between banks and online lenders. Online lenders offer convenience and fewer stipulations, but shorter terms and higher interest rates. Banks are slower and have higher qualifications, but offer longer terms and lower interest rates.

A business term loan refers to any sum of money paid back with regular payments for a set term length. They have a fixed interest rate and the term is usually one to five years. They’re typically used for one-time, larger investments – like real estate or large projects.

Do You Qualify for a Business Term Loan?

Many businesses can qualify, but it depends on your credit score, financials and how long you’ve been in business what your terms will be. Your loan length, size, and interest rate will vary based on these important factors. They also might require collateral to secure the loan, and you could lose that collateral if you can’t repay it. Depending on the provider, it’s often harder for startups to get larger term loans, but there are options out there.

How Do You Apply?

Term loans, traditionally, come from a bank. The application process from a bank will be longer and require several physical documents. They’ll usually require a meeting or two. For an online lender, like Kabbage or Funding Circle, the application process is much easier and convenient. They all require the same information, but online lenders offer a more streamlined input process. Some lenders may charge prepayment penalties or other fees, so make sure you ask about them before you commit.

What You’ll Need:

  • Drivers license
  • Voided business check
  • Bank statements
  • Profit & loss statements
  • Credit score
  • Business tax returns
  • Personal tax returns

What are the Different Types of Business Term Loans?

Your only options for business terms loans come from either banks or online lenders. They each offer different tradeoffs, depending on what you’re looking for and your credit health.

  • Banks offer the lowest rates, but you need to have good credit and a strong financial history. These traditional loans also take longer to apply for and receive. Getting these traditional business term loans is also hard if you have no collateral to secure them with.
  • Online lenders offer quick access to funds. They’re very easy to apply for and have looser credit and business financial history requirements, but typically have higher interest rates.

Business Term Loan Uses:

Business term loans are usually used for large business investments – things that would be pretty difficult to shell out the cash for upfront, or would cut into your cash flow. Term loans are a great option for large purchases because they spread out the payments and make them easier to handle. They’re best suited for things like:

  • Equipment – computers, industrial kitchens, etc.
  • Real estate – such as a new business location.
  • Production – building a new product or beta-testing software.

The goal of getting a business term loan is to come out of it with more money than you spent on it, so it takes a lot of planning and calculation to make sure you’re going in the right direction for your business. For a term loan, like any loan, you’ll end up paying more than your purchase because of interest, but if you play your cards right, it’s almost always worth it.

What Will It Cost You?

Business term loans are one of the simpler funding methods to figure out when it comes to total repayment, but they can still have very complex terms. Here’s a run-down of how the repayment works:

If you’re trying to build an expansion onto your restaurant, you need a loan to make that large, one-time purchase happen. After you’re approved for and receive a $100,000 business term loan and after you purchase the equipment and materials and hire a contractor, you’ll most likely have to start paying monthly payments. Those monthly payments will include a 12% interest over a 10-year period. If the interest is on the principal amount borrowed and not compounded, your monthly payments will be about $933 per month. This all depends on the loan stipulations and how the interest is compounded, but it can give you a basis of how business term loans work.

What is Amortization?

Term loans are paid in a very complicated way – they amortize. This means that each loan payment doesn’t go equally toward interest and principal amount. Early on in repayment, lenders stack on interest payments and leave payment toward your principal for later on.

Through the course of the loan, these payments will start to equalize and eventually the amount to pay toward your principal will surpass the amount you pay in interest. Your monthly payment is still the same amount, only the proportion of interest to principal changes.

Lenders do this so that just in case you pay off your loan early, you’ve still paid most of your interest to the lender. This means you save less than you’d think by paying off a loan before the term is over.

At FaaSfunds, we’ll figure out if a term loan works for your business, and we’ll quickly match you up with a lender that fits your needs. We’ll connect you to the top business term loan lenders, and get you approved in as little as a day.  When you sign up with FaasFunds, we analyze your business needs and finances and figure out if a term loan is the best option for you. We’ll also link you up with an industry expert to help you through tough financial decisions. Navigating the financial world is tough, so make it easier with FaasFunds.

Still feel a little lost? Don’t worry, we care about your success. Let one of our Funding Specialists guide you towards an informed lending solution for your situation. Sign up today and become a better borrower.

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