I hope everyone is doing well, staying safe and healthy. We’ve been totally remote for a couple of weeks now and know how uncertainty there is around the entire public health situation. We’ve been actively following the economic disaster relief conversations and spent a lot of time trying to dissect the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Here is what guidance we are receiving at the moment. For any businesses, your own or potential customers, that are in dire need of relief assistance there are two separate processes on the loan options and solely for the purpose of sustaining business (does not apply to the self-employed 1099 employees). The first is available already and the second should be active in the coming week or so.
Businesses can apply for the Economic Injury Disaster Loan (EIDL) program – they have released a streamlined application as of this morning (link below). According to the guidelines, the EIDL is eligible for an advance of up to $10,000 within 3 days of applying whether you get the loan or not and does not have to be repaid even if the loan is denied.
The Paycheck Protection Program (PPP) Loans – everything we understand at the moment – will have to be administered by an approved SBA lender, such as a local bank. I have been in touch with local bankers and they are still waiting on their guidance and guidelines; it’s an evolving process still. When there’s better information available I’ll be happy to share that with you. If you have a local bank you’re able to work with, that’s probably the best place to start.
That said, the link to apply for the EIDL is below. It is not a simple process, but it’s more straightforward than previously. If you have questions, please feel free to ask our team for assistance.
Thanks and let us know how else we can help you and your business continue to move forward through this turbulent situation.
I sincerely hope everyone is managing themselves, their families and their businesses well during this stressful time. We’ve been working through an unprecedented situation on a global scale and there’s no doubt it has been anxiety inducing for almost everyone. Particularly for a number of small business owners I’ve spoken to, the frustrations and uncertainty around how their business is going to survive, or if it will come out of this still functioning has been at the forefront of their thoughts.
I know this is a tough time. I’m also relieved to say there looks to be some help coming fast.
On Wednesday, March 25, the Senate passed the $2 trillion Coronavirus Aid, Relief, and Economic Security Act, CARES Act, H.R. 748. A section-by-section summary can be found here. The CARES Act is a bipartisan package providing essential economic support to businesses of all sizes across the country, and their workers (among other relief measures). The House of Representatives will take up the bill at 9am EST this morning, and it is expected to pass and be signed into law. While not perfect, this deal gives the small businesses around the country a fighting chance against the economic catastrophe being caused by COVID-19 and will help us all to prepare for recovery.
Prior to the CARES Act, two other measures had already been implemented earlier in March. On March 6th, the $8 billion Coronavirus Preparedness and Response Supplemental Appropriations Act which was signed into law and on March 18th, the Families First Coronavirus Response Act, H.R. 6201, was signed into law. Combined, the two new provisions expanded unemployment insurance, sick leave, and family medical leave to workers employed by businesses with under 500 employees for Coronavirus-related causes through the end of the year. Congressional leadership has indicated it may need to pass additional bills in the coming months to relieve the total impact of the crisis.
The $2 trillion economic stimulus bill, provides direct relief to taxpayers, small businesses, corporations, hospitals and states and localities. In short, the bill provides:
$500 billion for loans and assistance to companies including $58 billion for loans and grants to state and local governments;
$350 billion in loans and aid to small businesses,
$150 billion to hospitals and health care providers and direct payments, enhanced unemployment insurance and other services to individuals.
Below is a summary of the provisions which should be of highest interest to small businesses countrywide. FaaSfunds will continue to provide information in the coming days and, as always, our team is here to offer guidance and assistance as new regulations are released.
Business Tax provisions:
Employee retention credit for employers subject to closure due to COVID-19. Provides a refundable tax credit for 50% of wages paid by employers during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended due to a COVID-19 shut-down order, or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year but does not include employers that receive an SBA interruption loan described below.
The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to COVID-19-related circumstances. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
Delay of employer payroll taxes. Employers and self-employed individuals can defer payment of the employer share (6.2% Social Security tax) of the payroll tax. The tax will require the deferred tax to be paid over the following two years, with half due December 31, 2021 and half due December 31, 2022. Does not include employers that receive an SBA interruption loan described below.
Net operating loss deduction. The provision allows businesses to fully carry back net operating losses occurring in 2018, 2019, and 2020 to the previous five years, allowing them to amend previous tax returns to get a refund and help cover liquidity demands.
Section 2304. Modification of limitation on losses for taxpayers other than corporations. Modifies the loss limitation application to pass-through businesses and sole proprietors.
Modification of credit for prior year minimum tax liability of corporations. The provisions accelerate the ability of companies to recover those AMT credits, permitting companies to claim a refund now.
Modification of limitation on business interest. Temporarily increases the cap on business interest expense deductions for 2019 and 2020.
Changes regarding qualified improvement to property. Enables businesses to accelerate depreciation of some improvements.
Small Business Interruption loans (Section 1102), Paycheck Protection Program. The bill provides nearly $350 billion for eligible coronavirus-impacted small businesses. We anticipate these loans will be in high demand, if interested in this program contact an SBA approved lender.
Eligible Businesses. Businesses, self-employed individuals or 501(c)(3) organizations with fewer than 500 full or part-time employees or businesses which meet the SBA small business threshold, whichever is greater, with some exceptions for restaurant and accommodation multi-location businesses. Employers must have been in business on 2/15/2020 and paid taxes on their employees or contractors. Employers must certify that the need for the loan is coronavirus-related and that they will use the funds to maintain payroll and retain workers.
Covered period February 15-June 30, 2020.
Loan can be used for payroll costs which include: sum of payments of compensation (includes salary, wage, commission, cash tip, family, medical or sick leave, allowance for leave, payment for provisions of group health care benefits, including insurance premiums, payment of retirement benefits, payment of state or local tax assessed on the compensation of employees and sum of payments of any compensation to a sole proprietor or independent contractor that is a wage, commission or similar compensation and in an amount that is not more than $100,000 in 1 year prorated for the covered period), payments on mortgage obligations, rent, utilities and interest on other debt that was incurred prior to 2/15/2020.
Loan size . 2.5 X the average total monthly payments for payroll costs incurred during the one-year period before the date the loan was made, not to exceed $10 million. Interest rates not to exceed 4%, loan length 10 years.
Collateral No personal/individual guarantee on loan and SBA guarantees 100% of loan, no pre-payment penalty.
Loan forgiveness. Recipients are eligible for tax-free loan forgiveness for the portion of the loan used to cover payroll costs, payments on interest of any mortgage obligation, rent, utilities for the 8-week period after the loan is originated. Forgiveness is proportionately reduced if workforce is reduced during the covered period. Borrowers that rehire previously laid off workers will not be penalized for having reduced payroll at the beginning of this period.
Additional SBA Enhancements
Increases the maximum loan amount for an SBA Express loan from $350,000 to $1 million.
Additional $10 billion for SBA to provide economic injury disaster loans to small businesses that employ under 500 workers. Applicants can be approved for loans based on credit score. Personal collateral requirements are waived for loans totaling less than $200,000, as are requirements for borrowers to have to been in business for at least a year, and the requirement that an applicant be unable to obtain credit elsewhere.
SBA is authorized to give grants (up to $10,000) to any business eligible for a loan within 3 days of receiving a disaster loan application, to cover needed expenses (including payroll, rent, and mortgage payments).
SBA Administrator has the authority to purchase loans made before the date of enactment of this act and provide the borrower a six-month deferment on payments.
Allows employers to receive an advance tax credit from Treasury instead of a refundable tax credit for coronavirus-related sick and family medical leave related costs.
Places limits on Coronavirus employer paid sick and family and medical leave.
Economic Stabilization Fund to Assist Severely Distressed Sectors of the Economy.
Provides $454 billion in secured funds for loans and loan guarantees for businesses and states that have not received economic relief through other loans in the bill. The liquidity assistance provided by the Federal Reserve can be in the form of direct loans to businesses or governmental entities or the direct purchase of debt obligations or securities from the business. Assistance can be in the form of the purchase of bonds, loans, and securities directly from banks or from investors in the secondary market. Collateral is required for all loans given by the Federal Reserve and Treasury, and all loans, bonds, and securities purchase by the Federal Reserve must be collateralized.
Direct lending must meet the following criteria:
Alternative financing is not reasonably available to the business.
The loan is sufficiently secured or made at interest rate that reflects the risk.
Duration of loan shall be as short as possible but not more than 5 years.
Prohibits stock buybacks, unless contractually obligated, or payment of dividends until the loan is no longer outstanding or one year after the date of the loan.
Borrowers must, until September 30, 2020, maintain employment levels as of March 24, 2020 to the extent practicable, and retain no less than 90% of its employees as of that date;
A borrower must certify that it is a U.S.-domiciled business and its employees are predominantly located in the U.S.
Loan cannot be forgiven.
The bill also directs the Treasury Secretary to establish a program that provides banks with liquidity to make loans to businesses with between 500-10,000 employees, capping interest rates at 2% and providing 6 months forbearance, on condition of the entity maintaining employment and meeting collective bargaining and other requirements.
To find a breakdown of relief funding for each state, please click here.
Family, Friends, and anyone affected by the public health situation (basically everyone at this point),
I wanted to reach out briefly during this strenuous time and check in. I hope you’re doing alright with all the uncertainty. I know there’s a lot of anxiety in the air and understandably so. I am confident that we’re going to be able to weather this storm and come out all the stronger once it’s past. We’re all in this together and I’m here if you need anything.
To the business at hand – one of FaaSfunds goals is to help businesses understand their current financial health and the best financial products available to help them grow into the future, currently, there are a number of COVID-19 restrictions on funding due to the growing public health concerns. Each situation is unique under these circumstances, so we’ll keep you updated with new information as it becomes available.
Please don’t hesitate to connect with us about ANY finance questions related to your business. We’re happy to help.
If you are interested in COVID-19 economic relief assistance, please review the resources below and, again, we’re here for assistance if you have any questions.
We’ve recognized these as credible sources for information regarding COVID-19 relief programs:
Keep in mind, the entire COVID-19 relief program and public health response is an extremely fluid situation. There are a lot of moving pieces and it’s important to stay aware and up-to-date on all the changes as best you can. Let me know if I can assist you in that regard.
Furthermore, please click on the link below to gain more information about other financial products that are available to you:
Things are going pretty well, but does that mean you should expand your business? There are countless factors that go into building out your small business, so how are you supposed to know which of them is the right trigger for business expansion? Expanding isn’t rocket science, but it still has a pretty intricate formula if you want to make the right investments. Business expansion doesn’t always mean opening up a new location, it could also mean expanding your staff or offering new products or services.
This isn’t a definitive list of requirements to expand your business, because economic factors vary, but think of this as guidelines.
What You Should Have
Regular Customers – if you want to expand your business, you should be bringing in business. Not only that, but they should be returning customers. If you’re thinking of opening up another bakery, you should see familiar faces every day, and if you’re a marketing agency, your clients shouldn’t be returning for multiple campaigns. The more customer retention you have, the better an indicator it is that you’ve really got something good going.
Regularly Increasing Profits – You should be making a profit if you want to expand your business. Ideally, you should be making enough profit on your own to sustain the business expansion, because that’s what’s going to happen while you’re preparing it. Keep an eye on your business’s net income, and if it’s steadily increasing over a long period of time, then it might be time for expansion.
The Industry is Growing – you might be profitable and have a lot of customers, but if you’re in a stagnant industry, it might not be the best idea to open up another location or expand your operations. Some good things can’t last, and if it seems like your market sector isn’t projected to grow, a business expansion might not be a good investment. Check on industry trends and stocks in your sector regularly.
Too Much Business – ideally, you should be having so much business that one location can’t meet all the demand coming in. You either don’t have enough room, resources, or staff to handle it all. Intuit says that “an excessive workload isn’t just a sign that you should grow; it’s a sign that you must grow. Trying to press ahead without expanding your staff could cause quality, consistency, or deadlines to slip and send your business in the other direction.”
What You Should Consider to Expand Your Business
Do customers want you to grow? Explore your market – check out your Yelp or Google reviews. Does it seem like your customers want you to expand your business? Do they spread the word about you? Is there a lot of traction and hype surrounding what you’re doing? If there’s a lot of talk around town about your business, that’s a good sign your customer base would quickly take to another location, or you’d gain more customers by doing so.
Forbes says, however, to be wary of sudden and inconsistent spikes in customers – “If you see a sudden surge, don’t take that as your cue to expand your business immediately. Your increase in customers might be due to business seasonality or another market fluctuation. Wait a bit to see if your increase in customers is consistent or temporary.”
Keep track of what your customers are asking for and requesting, this way you’ve got an idea of which investments to make.
Can income from one location support others? This is pretty important, because as mentioned, it’s probably what has to happen while you’re preparing to open another location or expand operations. Expanding, in a way, is like starting over again. You’re new location won’t be making a revenue for a while, and so you’ll have to prepared to support the entire cost of it.
What’s your location like? If you want to open another location, where do you plan to open up? Have you looked into demographic data, and does it match that of your original location? Has there been talk in this area about a need for your business? There are all geographical factors to consider because let’s face it, it’s all about location these days. You need to make sure you lock down a location with enough in common with your original that it can sustain your vision or continue to bring people in.
Is there more work than you can handle? If you haven’t really considered business expansion, but have had trouble keeping up with demand, this might be a good time to start thinking about it. Saying “no” to business isn’t fun, and you know you’re losing out on money. In order to capitalize on those opportunities, it might be a good idea to look into expanding your operations or opening another location. This way, you can get the most out of what you do best, which is what you offer your customers.
Is your staff ready to support other locations? Will you have to put other operations on hold? Chances are you’ll have to hire more staff once you expand, but if you have certain staff members dedicated to certain back-of-house operations, will they be able to take on a higher demand? Consider this before you ask your staff to take on new responsibilities.
Interested in learning about financing options to expand your business? Or if business expansion is right for you? Consider FaaSfunds – talk to one of our financing experts, or sign up for our business credit monitoring platform today.
You might have heard of ROI. It stands for return on investment, and business owners use it as a method for decision making in trying to turn a profit. It’s a simple concept, in theory – it essentially means that in order to increase your business’s profitability, you should always shoot for a positive ROI – don’t make business decisions that give you a negative one.
But Wait, There’s More
Put simply, ROI is the result of the investment, but it has complex terms behind it. It’s a performance measure, and anything that measures performance involves some sort of math. The ROI formula takes the benefit of investment and divides it by the cost of the investment. The result is a percentage, and that represents your ROI.
The benefit of an investment is calculated by subtracting the cost from the current value of the investment. So your ROI formula is represented like this:
The current value of an investment is the proceeds from the sale of the investment in question. The result is always going to be a decimal, but it’s easily convertible to a percentage. This expression as a percentage makes it comparable, so it’s easy to see which investments are best for your company.
Why is ROI Important?
ROI matters because it gives you insight into future business decisions. If you know, to some extent, what your return will be from making a purchase, it’ll help grow your business. Especially when it comes to getting a loan or financing business purchases, ROI is an important tool.
ROI for Financing?
If you’re trying to get a loan or finance anything within your business, it can be important to use your ROI to calculate if the loan will generate enough revenue to justify taking it out in the first place. Loans always end up costing more than the thing you’re getting a loan for – these are the unfortunate facts of finance. It’s always a matter of planning to make sure the investment in one is going to benefit you in the long run, even if it will end up costing more.
The point of an ROI is to compare it to other investments in order to see which one(s) make the most logical sense to pursue. So, if you’re trying to figure out if you should finance a kitchen or a new point-of-sale system, knowing your ROI is recommended. You can prioritize the investments with the highest ROI, and then slowly make your way through your portfolio of investments.
ROI Calculation Breakdown
So, for financing, ROI would take the cost of the total loan – say you’re taking out a total of $12,500 (with interest and fees) for a new photo booth – and subtract it from the total value of the purchase. How do you find that? Well, in the case of a photo booth, it’s likely you’re running a business that rents them out for events. If you expect to rent it out for four events a month at $500 each time, that’s a revenue of $2,000 per month. And If you’re financing the equipment over a two-year period, you’ll pay $522 toward the total loan per month, for 24 months.
You can figure out the ROI for the term of the loan. At $2,000 monthly over the two-year period, you can expect to bring in around $48,000. That’s your total value. Subtract your loan cost from this total value and you get $35,500. Finally, you divide that by the loan cost, as exemplified by the formula, and you get 2.84, or 284%
Obviously, this shows a very positive ROI and would represent a good investment. If you were running a party rental business, you could use this method to compare different pieces of equipment and figure out which would be best to recieve financing for.
As with any method of financial calculation, ROI isn’t fool-proof, and it does have its shortcomings. The Harvard Business Review (HBR) makes the case that the “single most important limitation in this category results from the fact that ROI oversimplifies a very complex decision-making process.” It claims that the measure can be simple and easy, but also unrealistic. Because the rate of return is objective, and there’s no real way to know what you’re going to gross in revenue, so it says that relying on ROI can be thin ice to tread.
HBR also states that ROI remains constant no matter the economic trade-offs. It’s the same no matter the assets, time or number of investments. This can be problematic because it can ignore economic factors that could inherently influence profit acquisition for your company.
In the End?
With all this being said, the best idea when using any predictive measure is to always predict for losses, and not rely too heavily on subjective calculations. ROI can be good, however, for understanding a general idea about your investments and if they’ll be profitable.
Want to know more about managing your finances and loans? FaaSfunds is a free, business credit monitoring and managing program, and we can help with whatever you need to put your business on the path to success. Check us out today.
You went through the underwriting process and you managed to secure a business loan – what do you do now?
Arguably harder than getting a business loan is paying it back. The monthly payments can take a large chunk of your business’s revenue, and it’ll take quite a bit of planning to make sure you’re on time and keeping up with payments. Here’s our definitive guide to after you receive your loan.
Try to Pay More Per Payment
That’s a given – if you have the ability, try to pay more than the recommended monthly payment. If you can’t afford to pay significantly more, try just simply rounding up each payment term. For example, if your payment is $365 a month, go ahead and pay $400 a month. This $35 extra per month can add up, and help you pay off your business loan quicker.
You can also try to make one extra payment per year. Ideally, this should be about the size of your usual monthly payment or larger, that way you can really put a dent in the total amount.
Before you do this, however, make sure the business loan you’re paying on doesn’t have penalties for prepayment. Some lenders require fees for prepayment because the loan isn’t acquiring as much interest over time.
Many lenders allow your bank account to be auto-drafted for your payment every month, but if that’s not your thing, make sure you’re remembering when your payments are due. Make the correct adjustments to your cash flow to make sure you’re all set – if your loan payment is due the same time as your rent, make sure you’ve planned for that and set aside money.
Setting reminders on your phone are the best way to keep up, that way you’re consistently notified every month. Even if you have auto-draft, make sure you’re aware of when your payments are drafted, so your bank account has enough funds.
Build Your Credit Score Via Your Business Loan
Remember, business loans aren’t only about paying for things – they’re also vital in building your credit score. Keep that in mind every time you make a payment. If you miss a payment or pay late, your credit score gets penalized. The more consistent you are, the more this “good behavior” will reflect in your score. If you can keep a good score – or increase it – then you’ll be able to attain future funding or refinancing at better rates.
Make a Business Plan
Use the money you just borrowed to grow your business. Business loans are meant to be investments in the future, so the best way to ensure that you’re using them to their best potential is to make a detailed plan of how you see your business going in the next few years. Layout how you want to use the money – whether it be for equipment purchases or for investing in new opportunities, you want to make sure you keep track of where you’re spending it and if it’s going to contribute to growth.
Look Into Refinancing
This something to think about longer down the road. Once you’ve paid a good bit on your loan and your business is making more in revenue, it could be a good plan to try and refinance your loan to get a lower interest rate. If you’ve been paying on time and your credit is improving, it’s an even better reason to refinance. As your credit improves, lenders will usually give you better interest rates. If your business is more well-established, you might want to look into getting an SBA loan to refinance, they’re usually the lowest-interest business loans on the market.
How you use your loan is up to you, just make sure you’re really thinking about how you spend. Loans are meant to be opportunities, not hindrances.
Want more direction on how to use your business loan, or are you looking to get a business loan? Check out FaaSfunds proven software to help you find the right loan for your business, or speak with one of our finance experts today.
Starting a business is stressful, not to mention if you want to register as a limited liability company (LLC). An LLC takes aspects of different business types and combines them into one big (and sometimes complicated) establishment. But no fear, we’re here to clear it up for you.
How is an LLC Different?
LLCs differ from say, a sole proprietorship, in the sense that the business owners aren’t usually personally responsible for its debts or lawsuits. When it comes to the IRS, though, LLCs have this odd assortment of tax flexibility, which can cause varying degrees of confusion when tax season comes.
LLCs can technically choose their tax status – they can pick if they want to be treated like a sole proprietorship, partnership or corporation. If there’s only one owner (also known as a “member”) it’ll automatically be treated as a sole proprietorship. If there’s more than one owner, it’ll automatically be treated as a partnership. However, if you want your LLC to be taxed like a corporation, you can fill out a form with the IRS to change this tax status (here are all the hard details from the IRS if you’re looking to file your taxes as an LLC).
So the real answer is, LLCs don’t differ in the eyes of the IRS because they’re filed the same way as other business types, and they’re usually filed on the owner(s) income taxes. They do, however, require more paperwork and higher fees. But the real reason an LLC is a common choice for business owners is that if for some reason your business must file for bankruptcy or gets sued, being an LLC would mean your personal assets are covered. In the eyes of the law, your business is separate from you.
(Here’s a disclaimer, though – banking, trust and insurance industry-related businesses can’t be LLCs, and several states won’t let accountants, doctors, architects or healthcare workers be LLCs, either.)
Articles of Organization
If you want to start an LLC, you’ll have to file articles of organization in the state where you want to operate. They often only require basic information, nothing too complicated. Remember, the requirements and stipulations do vary by state, so you’ll definitely want to check specifically for what your state requires. However, most states will require these basic things before you file your articles of organization.
A business name, and it has to end with “LLC.” It also has to be unique, and can’t be the same as another LLC in your state. They’ll also want it to not be confusing – such as including the word “bank” when you’re not a bank (Legal Zoom lets you search to see if your name is available).
Location – where will your business be physically located?
Names and addresses of the owners (a.k.a. members).
A registered agent – this is the person or entity that accepts the legal papers of your LLC. It can be you or a co-owner. You can also appoint your business attorney as your registered agent, or you can get registered agent services from online legal services.
It’s very important to make sure you’ve got all the local licensing requirements down. Counties and cities may have more specific requirements than the state does (FaaSfunds is in Charlotte, N.C., so we have a specific set of rules – the rules and applications for your city/county will be found on a similar local website). Certain industries are regulated more heavily than others as well, like food and beverage. Contact your secretary of state office to figure out these specific rules.
You could also draft an LLC operating agreement, which isn’t required but is recommended. It simply outlines organization and structure for your LLC – like who will do what within the LLC, how much money has gone into it and who contributed it, along with other operating procedures. It’s a legal document, so once signed, it’s binding. By creating terms and having all active parties agree to them, it creates less confusion about everyday business.
How To File Articles of Organization
First, you’ll file the articles online or by mail. These details vary by state – in North Carolina, the form is available to fill out online and has a $125 filing fee. Once you fill out the form, submit it and pay the fee, you’ll receive confirmation in the form of a certificate from the state, which can take a few weeks.
What About After?
If you haven’t made an LLC operating agreement yet, now could be a good time. You should also apply for an employer identification number (EIN) if you have employees. This is essentially a social security number for businesses and is important in separating business finances from personal finances. This way, you can start to establish credit as a business and apply for loans and credit cards without intertwining your personal finances.
If you want to know more about building business credit or getting a loan for your new LLC, let FaaSfunds help. We’ve got industry experts to provide you with credit advice and proven loan-matching software. Check us out today.
Crowdfunding is a term used for business funding meaning exactly what it sounds like: funding your business through a large number of people. The word has been adopted to mean different things, depending on the industry. To save confusion, however, we’ll stick to its meaning strictly for new businesses and startup funding.
Crowdfunding is mostly done online, makes this specific form of funding a newer development. We’ll start by going through models.
Kickstarter, perhaps the most well known, is a site that rewards people for “donating” to your business. If you’re selling a product, usually you’ll promise that product to your customers. If your selling something less-tangible – like a dating app or a service – companies will usually promise funders some sort of “swag” or benefits. Whether it be t-shirts or branded koozies, those who give you money often expect something in return, the same way an investor or venture capitalist would, but on a smaller scale. In order to raise funds on Kickstarter, you MUST deliver something to your funders, and you MUST meet your goal, or else you don’t get any of the cash you raise.
Other crowdfunding sites, like Indiegogo, don’t require you to give swag or meet your goal in order to cash out. This can be good for a content creator, but for an actual business, sometimes providing an incentive (like a product) motivates people to give you money. However, these options can be more convenient and cheaper than a Kickstarter campaign, and if you already have a grassroots supporting, they’re likely to get help with funding.
The most recent development in crowdfunding is called equity crowdfunding, and it’s similar to an actual investment-model of funding. Through it, accredited and non-accredited individuals/investors can invest small amounts in your company in exchange for equity, or small bits of ownership. This is especially popular for hyper-local efforts, like breweries or coffee shops. It gives community members a way to invest in their community and its well-being.
After the recession in 2008, the government realized the new businesses were being virtually wiped out by their inability to get credit and funding. So in 2012, they passed the JOBS Act, which allowed non-accredited investors to legally invest in private companies. Non-accredited investors are individuals who have a net worth of less than $ 1 million OR who earn less than $200,000 annually. That’s it. So now, pretty much anyone who wants to invest in a business through equity crowdfunding is able to.
In 2015, the government furthered equity crowdfunding de-regulation by allowing businesses to raise up to $1,070,000 per year and required that all transactions be done through an SEC-registered intermediary, either a broker-dealer or a funding portal (like a website).
With equity crowdfunding, there are a few things you should be aware of. First, state laws regulate it. Depending on where you are in the country, the amount of money and types of investors could be significantly different. For example, in North Carolina, the 2017 PACES Act extends the amount of money that can be received from crowdfunding to $2 million and specifically allows for a non-accredited investor to give up to $5,000 per year via equity crowdfunding.
These regulations vary widely by state, so it’s important you be aware of the rules for your state before you decide to do an equity crowdfunding campaign. Like pledge crowdfunding, these are also done through online portals.
What Are the Risks of Crowdfunding?
Pledge-model crowdfunding runs a greater risk of failure than say, venture capital. Most sites often don’t require that the business have a solid business plan, and that can run the risk of fraud ruining the reputation of websites (like GoFundMe, for example).
There’s also no real advising available when you sign up for Kickstarter or Indiegogo, which doesn’t really set entrepreneurs up for success. VCs and angel funds usually provide council. However, equity platforms authorized by the state you reside in often have more realistic models of setting up business owners for success. For a fee, you get counsel when you sign up for the platform. You also often have to provide a solid, fool-proof business plan. This way, there’s less room for error, and your company has a better chance of success.
With crowdfunding, there’s always going to be the chance you don’t get the money you need. Like rallying investors, it’s a hard process and can take ages. If you’re in need of more immediate, tangible funding, you might want to look into business loans or lines of credit. If that’s the case, FaaSfunds is here to help. Reach out to us today to get matched with the lender and loan that’s best for your business, and to receive professional financial advice.
When you choose to refinance something, you usually decide to do it because it makes your previous financing options or purchases more affordable. What exactly does it mean to refinance? Fundamentally, it’s when you decide to revise the terms of a previous credit agreement. Most often, you’ll refinance when nationally-set interest rates go down and can result in savings on monthly payments with a new agreement.
How Does Refinancing Work?
Refinancing is essentially just getting a new loan to replace an old one. The main motivation for refinancing is dependent on the market and the current interest rate environment, but if your business credit has improved, that’s also a reason to refinance a loan. Typically, during times of slow economic growth, interest rates will be lower to stimulate spending and investment. During times of expansion, however, interest rates will be higher.
Different Types of Refinancing
Rate-and-term refinancing: when a borrower directly replaces the existing loan with one with a lower rate.
Cash-out refinancing: when a borrower takes out a loan for more than they owe on the previous loan, so they can use the extra cash to pay off other debts.
Cash-in refinancing: when a borrower pays cash for some of the remaining loans, in order to lower the loan-to-value ratio or get smaller monthly payments.
Consolidation refinancing: when a borrower takes out one, lower-interest loan to pay off several, higher-interest debts.
The Best Strategies
How do you know when the best time to refinance is, or if you should refinance at all? First, calculate it (this one is specifically for mortgages, but the results are easily transferable to other loans), then, consider these factors:
Falling Interest Rates
The best strategy for loan refinancing is to pay attention to national interest rates. Interest rates fluctuate based on policy, global factors and the economy. If national interest rates fall, and you can get a new loan at one to two percent below your current rate, then it’s reasonable to consider refinancing in order to secure that lower rate and save money. This is an example ofrate-and-term refinancing, where the existing loan is paid and replaced with one with a lower rate.
Increase in Value
If the thing you used the loan to purchase – property, equipment, etc. – increases in its value (this will usually only happen with property because most equipment depreciates in value), that could be a reason to refinance. This idea works well with cash-out refinancing. With this, you take out more than your current loan amount left to pay and use the extra cash to pay off other debts. If your property has increased in value, you’re more likely to be able to take out more money than what you owe.
The better your credit, the better your rates and terms on loans usually are. If your credit score and financial health have increased significantly, refinancing could save you money because it can lower your interest rates.
The technique of consolidating debt means that a borrower takes out a lower-interest loan to pay off one or several higher-interest debts. This is a refinancing technique used with things like credit card debts – if you have several different credit card debts, it might be beneficial to take out a single loan to pay them all off, so you can only have one payment at a single, lower interest rate.
Things to Look Out For
Closing costs – Some new loans may have closing costs, which are usually based on a percentage. Make sure you calculate in the closing costs when you’re trying to figure out if the refinancing will save you money, because you could end up paying more even if the interest rate is lower.
Prepayment penalties – Make sure the loans you’re paying off in full don’t have prepayment penalties for paying them off earlier than the agreed-upon term. If they do have prepayment penalties, make sure you calculate to check that their cost doesn’t outweigh the lower interest rates in the long run.
Keep in mind – It often makes more sense to refinance early in a mortgage or loan repayment because you don’t own as much equity in the thing your financing (like property). Most loans amortize, and therefore most early payments go more toward the interest than the cost of the actual purchase. Later-on in a loan, you’re making more payments toward the actual purchase, so you own more equity in the purchase. When you refinance, you’re essentially starting over by taking out a new loan, and it will take you even longer to build up equity.
There are also things you shouldn’t do. Just because refinancing can lower the total cost of a loan doesn’t mean it’s always the best idea in the long-run. When you refinance unsecured debts with a secured loan, it can be a risk – which is sometimes the case when consolidating debts. This is because you risk putting assets – like your home or car – at risk for repossession or foreclosure. Another risk could be that you end up paying more because you extend the loan, as opposed to paying more per month but for a shorter period of time. If you start a new 30-year loan when you only have 10 years left on the original loan, it could add up to paying more, even if the interest is less.
Confused by all these options? If you’re looking to refinance debts, reach out to us at FaaSfunds. We have business financial experts that can help you make all the right choices for your business. Click the button below to get started today!