If you’ve ever written a cover letter while applying for a job, it’s easy to understand the purpose that a loan request letter serves. Cover letters let employers know your interest in a job, and why you’ll be a good fit in the position. Loan request letters have a similar purpose – they’re meant to exemplify your worthiness of receiving a loan. Like a cover letter, they’re meant to tell why you’d be a good fit for a loan, and how you’d use it to benefit your business – and ultimately pay it back. 

It’s all about how well you can present your needs to a lender – how you’ll use the money to grow your business in order to pay the lender back. According to  Alan Hunt, an SBA District Director, within your letter you’ll need to be able to portray clearly:

  1. How much money you’ll need 
  2. How your business will be using the loan
  3. How you’ll repay the loan
  4. And what you’ll do if you cannot pay the loan back

When Is a Loan Request Letter Needed?

Not all loans need a request letter. Smaller loan amounts just require an application, but as loans get larger, the requirements get stricter. Most of the time, letters will only be required by traditional bank term loans and SBA loans. Some might specifically request it, and some might require extra information you can turn into a letter, and will appreciate your thoughtfulness in doing so. 

Should you be worried about the differences? SBA loans have stricter requirements for letters because they backed by the government. SBA loans also require a bit more information. Here’s a breakdown:

  1. You’ll need to share financial information not only about yourself and your business, but also about any and all business partners. They’ll also want to know
  2. How much of your own money you’ve invested in your business. 
  3. You’ll need to be very clear about your business, because the SBA doesn’t fund certain types of businesses. You want to make sure it’s clear that you’re not a part of their ineligible businesses. For example, the SBA will not back loans going toward religiously-affiliated businesses, politically-affiliated businesses, passive businesses, or businesses that operate with a pyramid-style distribution plan. Find the full list of ineligible businesses here
  4. Exemplify your experience and your qualifications within your industry.
  5. Exemplify you and your team’s “good character.” business owners on parole are also not qualified for SBA loans.

Banks, however, are often interested in creating long-term customers, they care the most about your ability to pay them back. They’ll be interested in laymen’s terms of why you need the money and how you’ll plan to pay it back. Typically, these don’t need to be as in-depth as an SBA loan request letter. 

What Details Should All Loan Request Letters Include?

In addition to the details listed above, there are some smaller details and tips you should keep in mind when writing your loan request letter. 

  1. Keep it brief – keeping the parallel with a cover letter, you should keep your loan request letter under one page long. It will most likely be a challenge to include all the details you need in under a page, but underwriters don’t have all day to read and analyze your letter. They’re looking for the information they need in an easy-to-read package. 
  2. Give the background of your company and team. This puts a human aspect to your application, and lets lenders know who they’ll be benefiting. 

Here’s a chronological list of how your loan request letter should be structured, according to Fundera:

  1. Header
  2. Greeting (To Whom It May Concern…)
  3. Business name
  4. Business structure (S-corporation, partnership, LLC)
  5. Brief description of what your business does
  6. Time in business
  7. Number of employees
  8. Info on partners (if applicable)
  9. Annual revenue
  10. Why you need a loan
  11. Any vendors you’ll be purchasing from (if applicable)
  12. Evidence you’ll be able to repay the loan, supported by finances projections

Do You Have To Have A Loan Request Letter? 

Not all lenders require loan request letters. Online lenders are ones that don’t. Most of these lenders only require quick online applications. If you’re looking for a loan that’s a little less effort, FaaSfunds can help. We’re here to find the best business loans for your situation. Sign up today. 

*We’re all about helping you make good business decisions, so any opinions or views expressed in our blogs reflect that of our editorial team only and not FaaSfunds, LLC as a whole.

Second chances are important. That’s why making sure that business loan options are available to everyone, including felons, helps give individuals second chances regardless of their past. Business loans for felons can be hard to find, but not impossible by any means.

The U.S. houses 25 percent of the global incarcerated population. With so many individuals going through the prison system, there’s often not a way to ensure their homogenization and success after their release. It’s much harder to find employment because of their status as a felon, and that makes it much harder to assimilate and go back to living a regular life. Felons are 50 percent less likely to be offered a job, and when they are, they make 40 percent less. These roadblocks to success don’t make productivity any easier, so entrepreneurship is often an attractive and logical option for former inmates. For felons looking to start their own business, there can be several funding options. 

Is Success Possible?

There are quite a few well-known successful formerly incarcerated entrepreneurs, like Dave Dahl, founder of Dave’s Killer Bread, Performance Two founder Georgia Durante and Pigeonly founder Frederick Hutson. These are large-scale successes, but there are surely thousands of locally successful ex-convicts around the country. 

Andrew Medal, an ex-convict turned entrepreneur, writes for Entrepreneur Magazine that there are several factors that make former inmates ideally suited for entrepreneurship – they’re experts at bootstrapping, familiar with the unknown and know how to take healthy risks. These factors, however, don’t show up on a credit report. What’s it like trying to get a business loan as a felon? 

The Unfortunate Facts

If you’re looking for business loans for felons, it may not be an easy feat. When you get out of jail and don’t have a steady source of income, the reality of the matter is that your credit score is likely less-than-stellar. This makes qualifying for a loan considerably harder. It’s best to start off with some sort of debt-free financing, if possible. Debt-free financing is exactly what it sounds like – a version of business funding that requires no credit or repayment. One type is a business grant. 

Business Grants

Before you focus on business loans for felons, you might want to look into grants for felons. There are entire organizations designed specifically for ex-convicts and felons looking to turn their life around and become entrepreneurs, and several of them offer grants or funding help. Unlike loans, grants don’t have to be paid back, and many are designed to boost small businesses and jump-start careers for underserved entrepreneurs.

A great place to begin is grants.gov, where you can search for federal government grants that match what you’re trying to achieve. With this option, you might not find many designed specifically for felons, but you can look for ones designed for either the type of business you’re trying to start, or ones centered around your nationality, heritage or identity. Local governments and religious organizations often will have resources and programs designed to help felons achieve success, so it’s also a good idea to start by looking hyper-local.

Help For Felons is a website designed to help ex-cons assimilate into society. They don’t specifically offer grants, but they do offer tons of business-applicable tips. Nonprofits like Inmates to Entrepreneurs help ex-cons get information and access to the things they need to start their own businesses. They’re also an incubator, which is a program that provides training, coaching, networking and financing. Defy Ventures is another similar program focused on “humanizing connections” and has a range of programs from incubators to entrepreneur boot camps.

Crowdfunding

If you think your product or idea could gain traction quickly, and people have expressed interest, it might be worth starting a crowdfunding campaign. Sites like Kickstarter and Indigogo have proven to be successful tools for entrepreneurs in raising capital for their business ventures, and they don’t care if you have a criminal record. Crowdfunding is a form of fundraising where people donate online in support of your product. Depending on the platform you use, donators receive either equity, swag or a version of your product. 

Business Loans for Felons

  1. Equipment financing

If you’re looking for business loans for felons and your venture requires large equipment to get started, or even real estate, equipment loans are “self-securing.” The equipment or property acts as collateral to secure the loan. This means that you won’t require extra collateral to get them, which is good if you’ve just been released from prison and don’t have the best financials. Lenders are more inclined to give loans to people with less-than-stellar credit if the loan is secured, so your criminal history is not as important as it would be with other loans.

  1. Online Lenders

Online marketplace lenders are able to be more flexible on terms and qualification requirements than traditional banks – sites like Kabbage, OnDeck or Lending Tree. These could be easier options if you’re a felon looking for a business loan. These options do, however, cost more in interest than a traditional bank loan, but are usually quicker to acquire. 

If you have a criminal record and are looking to fund your business, or are trying to keep track of your business credit, let FaaSfunds help. We’re here to make sure you make the best decisions for your business.

What is Debt Financing?

Debt financing is when your company raises working capital by selling debt instruments. What are debt instruments? They’re binding obligations that provide funds in return for a contract. A credit card, credit line, loan, or bond – these can all be types of debt instruments. The “contract” includes all the details regarding interest, payments and timeframe. 

Simply put, debt financing is the same as getting a loan to start or operate your business. You pay the loan back with interest, and the terms depend on who’s lending it to you.

So with debt financing, it means you’d finance your business through these debt instruments. When you issue something like a bond, investors buy the bonds, and technically become lenders. They’re providing the financing, and you repay this “investment loan” back at an agreed-upon date in the future. If your company doesn’t succeed, the lenders have more of a claim over your assets than a shareholder would – and that brings us to equity financing.

What is Equity Financing?

When you fund your company through equity financing, it means you’re creating shareholders. By selling shares, you sell ownership in your company in return for cash, similar to selling stocks. It can come from several different sources – friends and family, investors, or an initial public offering (IPO). this will often, however, depend on the stage of a company. Startups will use different types of equity financing depending on the stage of funding they’re in. 

Types of equity financers are angel investors or venture capitalists. There’s also equity crowdfunding. Equity financing is ofter more important for certain types of startups, like technology or finance companies. 

So What’s the Difference?

Debt financing means you have to pay your lender back in cash, plus the interest they’ve decided to charge. You’re obligated to pay this back, even if your business goes belly-up. Equity financing means that instead of paying shareholders back in cash, you share your company’s profits with them, and you make business decisions with them.

Pros of Debt Financing

  • You don’t have to share your company with anyone, and you can make all the business decisions yourself. In fact, once you pay the loan back, you don’t have to worry about the lender anymore.
  • You’re also in control of how the money is spent. 
  • Loan interest is tax-deductible, so you don’t have to pay taxes on it when tax season comes around.
  • It’s relatively easy to predict and plan for loan payments because they’re the same every month. This way, you’re not hit with unexpected costs and you know exactly how much of your revenue is going toward paying back your financers. 
  • There are government-backed loan programs with the SBA, and they offer loans with significantly better rates. 

Cons of Debt Financing

  • The first word is often a con: debt. Debt isn’t always a bad thing, but it means that you’re using money you don’t technically have. 
  • The fixed-payments could get in the way of growth. Because loans don’t care if you didn’t make as much as you did last month or if business is slow, the payments can really cut into your revenue. If there’s an economic downturn, or if patterns of commerce change, you still have to pay the loan back on a regular schedule, or else they could come for your property.
  • And that brings up another downside – many lenders require collateral. If you default or if your company goes out of business and you can’t pay the lender back, they’ll seize your personal or company property – things like your real estate, equipment or vehicles. 

Pros of Equity Financing

  • You don’t technically have to pay anyone back. Naturally, you want your business to have a good return on investment, but there are no required payments to investors. They’re taking the chance on you and they’re investing because they believe in your company, and that’s their obligation, not yours.
  • You’ll have more capital available to grow your business if you don’t have to pay set amounts each month.
  • Equity financing is based on percentages, so profit-sharing fluctuates with revenue and isn’t a set amount.
  • It helps you build relationships because investors can act as mentors and give you advice on how to steer your business in the right direction.

Cons of Equity Financing

  • You don’t have full ownership of your company. In order to get funding from investors, you have to hand over a percentage of your company. This means you share profits and business decisions. You can remove investors by buying their share, but that’s often way more expensive. 
  • You’re not in full control of how the money is spent, and you have to consult with investors about the direction of your company.
  • It takes a lot longer than debt financing – you have to meet with investors and pitch your company. 

So Which is Better?

There’s no definitive answer because it all depends on your company’s type and profile. Most companies finance with a mix of both, because they’re both valid and popular ways to fund early businesses. But here’s a guide to help:

  1. Do you need money fast? Debt financing isn’t instant, but it’s quicker than equity financing. You go through the underwriting process and then depending on if you’re approved or not, you can have the money without having to go through a lot of meetings or company pitches. Equity financing requires a lot of time and effort to prove your worth to investors. 
  2. Do you need a lot of money? Equity financing is useful if you need a significant amount of money – around $300,000 or more. You can use debt for this as well, but equity gives you a way to fund and not worry about paying it back. 
  3. Do you need mentorship? Equity is best if you want a little bit more direction for your business. If you believe in your ideas, but don’t quite know how to execute them, investors often offer mentorship and knowledge – after all, they are now partial owners of your company and want to see it succeed. Investors are usually not strangers to helping companies grow, and will know all the ins and outs.
  4. What’s your business sector? If you’re trying to start a restaurant or a bar, you might want a lot of control with what’s going on, and won’t want to have to worry about listening to your investors. If you’re running a tech company, the tech world can get complex and has a lot of faucets and barriers to entry, so sometimes it’s better to use investment money and let someone help you map out your route.
  5. Do you want to scale? Equity firms are looking for people who want to get huge and grow beyond their locality. They probably would love for you to exit the market – that’s when they get big checks. If you’re looking to start a local business, debt financing might be better. If you want to expand beyond geography, equity financing might be better.

FaaSfunds offers credit monitoring for debt financing. If you’re interested in financing your business through loans or other forms of debt, reach out to us today.

You have a business idea and plan, but now you’re looking to raise business capital. Where to start? Saving money is hard, and asking for money isn’t any easier.

Getting business capital for your small business varies depending on the industry. There are several different types of funding that fit better for different business sectors. Here’s a breakdown of popular funding methods for different industries:

Arts/Entertainment

Startups in the arts and entertainment sector, according to data released by Seek Capital, obtain business capital mostly from VCs, and government-backed loans. They cost about $25,000 to $50,000 to start, and 53.1% make it past the first five years. 

Real Estate

Real estate startups mainly get their business capital from government-backed loans and personal savings, and they cost anywhere from $10,00 to $25,000 to start. About 59% make it past the first five years. 

Retail

Retail is the largest sector of the economy, and employees the most individuals. Most startups are funded through grants, bank loans and government-backed loans. They cost around $50,000 to $100,000 to start, and have a 55.1% five-year success rate.
Information

Information

Most information/tech startups use venture capital (VC) money, grants or credit cards. They’re the cheapest to start – $10,000 to $25,000 – but has the lowest five-year success rate at 44.3%.

Education

Education startups are obtaining business capital primarily through business and personal credit cards and grants from the government. They’re also relatively cheap to starts at $10,000 to $25,000 and have a 56% five-year success rate. 

Transportation and Warehousing

Transportation and warehousing startup’s main methods of funding include bank loans and personal and business credit cards. They cost about $25,000 to $50,000 to start and have a 50.1% five-year success rate. 

So, what are the different modes by which startups can obtain business capital?

Personal Funds

This is usually the most popular way to obtain business capital for a startup. Over 90% of startups get started without loans or grants. You don’t have to solicit for money, and you don’t have to worry about giving up ownership of your company. This method works if you

1. Have savings to spend and

2. Have time to save up.

Saving up can, however, take attention away from your business. Sometimes ideas need immediate action, and in order to capitalize on our quickly-changing consumer economy, you can’t wait to save up to act on them. 

Friends and family

This is often one of the first lines of finding business capital. Depending on the industry your startup is in, crowdfunding from friends and family might be the go-to. According to Martin Zwilling for Forbes, professional investors like to see that people trust you, and often by means of investing in your company. This doesn’t mean you shouldn’t proceed with caution, however. Taking money from your friends and family could affect relationships – if they don’t understand the nature of the startup world, or if they’re insistent on knowing the details of where their money is going, it could put a dent in friendships or family relations. 

Angel Investors

Angel investors are high net-worth individuals with a history of funding startups. The hard part isn’t finding them – they’re everywhere. The hard part is convincing them to invest in your ideas. You have to have a flawless plan and an even more flawless pitch. Lilach Bullock for Forbes says, “Find the right angel investor and not only will you benefit from their financial support but also their wisdom: oftentimes, they offer mentorship as a side dish alongside their capital.” There are also Angel Groups, which are groups of angel investors who pool their investment money. Angels are usually good for those looking to raise $25,000 to $250,000.

Grants

Grants are exactly what they sound like – business capital you don’t have to pay back. There is an infinite amount of grants out there, whether they be from the government or from other companies. They usually have some precursors, though. Many grants require your business to provide certain services or products, but some don’t. They’re also very competitive. There are many for diverse entrepreneurs and business owners – women, minorities, veterans, etc. Grants require pretty long application processes and aren’t often for that much, but the temptation of free money is usually all it takes to give them a shot. 

Venture Capital

The words might make some business owners cringe. Venture capitalists. But they’re often a vital part of getting business capital. VC money usually comes from firms, and they usually want quite a bit of equity and control. Zwilling says not to go after VCs unless you need more than $1 million (so, not in the earlier stages), and you should be prepared to spend at least six months on the process. 

Crowdfunding

Becoming increasingly popular, crowdfunding is a good way to use your already existing network to raise business capital. There are several online platforms, like Indiegogo or Kickstarter, that give you the ability to collect small sums of money from grassroots support. Naturally, the sites take a percentage of that earned. There are also some platforms that let you raise money via equity crowdfunding, meaning that individuals can actually receive shares of your company in return for their donations. These platforms, however, vary by state. 

Bank Loans

Sometimes, you just need a good old-fashioned bank loan. There’s nothing wrong with using loans to finance your business, as long as you’ve got a plan to pay it back. You retain full ownership of your company (as long as you make the payments), and you can use it to build your credit and get better terms in the future. Bank loans can also give you larger sums of money, if needed, and can be tailored for exactly what you need, like equipment. The drawback is having to pay interest on what you borrow. 

You can also obtain a line of credit and just use it for what you need. There are also SBA loans, which are backed by the government and have better repayment terms. These are competitive, but the good news is there’s a lot of them.

Interested in obtaining business capital through a loan or line of credit? Or, just want to know more about obtaining business credit? FaaSfunds can help. Reach out to us today to sign up for our FREE platform.

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

  1. 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.
  2. 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. 
  3. 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. 
  4. 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.

Money rules the world. This is the unfortunate reality – and it’s especially vital when you run a small business. The health and longevity of your business depends on it, so naturally, it’s worrisome.

In a study of 3,000 small businesses, Intuit and Wakefield Research found that 69% of them had been “kept up at night by concerns about cash flow.” So, feeling stressed about money isn’t uncommon – in reality, it’s pretty normal.

Cash Flow – The Data

The Small Business Administration (SBA) regularly releases data pertaining to small businesses and their struggles. In 2018, it reported that the largest reason businesses close (25%) was because of low sales or not enough cash flow. This is down from 2007 (39.9%), but nevertheless, access to cash is the most important indicator of a business’s long-term success. 

The Intuit and Wakefield Research data also found out that 52% of U.S. small business owners have lost more than $10,000 by not pursuing a project or sale because of insufficient cash flow. This keeps businesses in a constant cycle of struggling for capital – if they don’t have the cash flow to invest in new opportunities, they miss out on a chance to create more. Even more, 42% of small business owners have experienced cash flow issues within the last year specifically. 

What about getting capital through financing? The same study found that many business owners aviod it (39%) because they’re deterred by the interest rates (29%), they don’t want to make payments (23%) or they fear they wouldn’t be approved anyways (19%). The Small Business Credit Survey (SBCS) also reports that, in order to address financial challenges, 69% of business owners use their personal funds. 45% took on additional debt, 32% cut operations, and 28% just didn’t pay (meaning there’s some crossover, that some did two or more of the options). And then, the SBA echoes the same thing – by far the largest option that business owners choose to handle cash-flow issues is using their own personal money. 

Not only does lack of cash flow create skepticism about business financing, but it also creates stress on employees. The Intuiet and Wakefield Research found that 43% of businesses had been at risk of not paying employees on time, and 32% actually had paid them late. Forbes says this can lead to employees having mistrust in their employers, and being swayed by other jobs. 

From all this data, it seems like the root cause of cash flow struggles is waiting for payment from customers. 53% of surveyed companies use invoices to bill their customers, and the average U.S. small business has about $53,399 in outstanding receivables. This creates a problem for owners because if they don’t have the money they’re owed, they can’t pay for other expenses. On top of that, they also can’t make further investments, keeping up the constant cycle of struggling for cash flow because they can’t pursue other projects. 66% of companies say that waiting for payments to process, even after it’s been received, is the biggest impact on their cash flow. 

What To Make of the Cash Flow Data? 

First of all, we have to say that if you’re vehemently concerned about your business’s financial health (as you probably should be), you should seek the advice of your business accountant, or you should get a business accountant if you don’t have one already. They’re financial specialists that know your business directly and can give the most accurate advice. 

Since you know all this data and research, though, it can help you be more informed and aware of the struggles that plague small businesses. Since this is all based on actual businesses and real people, the more prepared you are for these struggles, you can foresee them and combat them. Knowledge is power, right? Financial literacy is vital for new businesses, and the more research you do into your industry, the more prepared you’ll be.

If you’re interested in financing to combat cash flow problems, give FaaSfunds a try. We’ve got business credit consultants on call to help you with whatever you need to benefit your small business.

Do you know all the fees associated with small business loans? No worries, not too many people can keep track of them all. It’s a vast and complicated world of jargon and hidden terms. Unfortunately, on top of interest and down payments, there are several other loan fees that could be included in certain small business loan packages, and we’re here to help you break them all down into easily-digestible parts. 

Ongoing Administrative Loan Fees

These may be monthly. Ongoing administrative fees are other costs your lender might tack on to your loan for “servicing and maintaining” it. They might be a percentage or flat fee, but can really add up after a while. If you’re working with a reputable lender, you shouldn’t expect to pay these loan fees. 

Application Fees

An application fee covers the costs of the actual application. Any costs to the lender for processing and accessing your application are passed to you through these loan fees, but this practice is pretty uncommon amongst lenders, so you’ll run into it less often than you will other fees. 

Annual Fees

Annual fees are often a flat rate added to your loan once a year. These loan fees are supposed to be for the service of maintaining your account, but this is not a common practice. Watch our for them, and chances are you’ll be able to find a lender that doesn’t charge them. If you can’t, though, it’s always a good idea to try and negotiate these loan fees, especially if you’re paying fees for other things. 

Closing Costs

Closing costs could be a name that encompasses many of the other loan fees mentioned in this list, so be on the lookout. They can include origination fees, processing fees, application fees or any other costs associated with packaging a loan. Closing costs are charged at loan closing – so, after you’re approved and are about to sign your loan documents, read carefully for these closing costs. Forbes advises lenders that, “When a lender mentions that you’ll have closing costs associated with your loan, you’ll want to know exactly what those closing costs are. That way, you can be sure that you’re being charged legitimate and fair fees.”

Collective and Overdue Fees

In addition to late payment fees, some lenders may charge collection and overdue fees if they have to actually take action to get payment from you. 

Credit Check Fee

A credit check fee is exactly what it sounds like – a fee charged from lender to borrower for having to check their credit. Checking credit of potential borrowers requires the use of software that usually costs the lender a fee, so sometimes they’ll pass that to the applicant. 

Guarantee Fees

Guarantee fees are usually charged only for SBA loans. When you take out an SBA loan, you aren’t getting the funds from the SBA, you’re actually getting them from lenders themselves. The SBA guarantees 75% to 85% of the loan, meaning that if your business defaults on the loan, the SBA guarantees that the percentage of the loan to the lender. They alleviate the risk for the lender. Because they’re taking on this risk, they charge the lender a guarantee fee, which they’ll sometimes pass on to you. It’s usually included in your loan and is deducted from the loan before it’s disbursed to you. 

The amount of these loan fees is determined by the term and loan amount and is based on the guaranteed portion, not the entire loan. For loans under $150,000, there’s no fee. For loans over $150,000 and terms of less than one year, the fee is 0.25%. For loans over $150,000 and terms over one year, the fees range from 3% to 3.75%. 

Non-sufficient Funds Fee

If your account doesn’t have enough money in it, the lender will sometimes charge you a one-time fee for an unsuccessful payment. This is similar to an overdraft fee charged by banks. 

Late Fees

Pretty obvious from the name, late fees are charged to the borrower when they’re late on their payment. These often range from $10 to $35 or can be around 2% to 5% of the outstanding balance. 

Lockbox Fees

These loan fees are pretty uncommon considering most payments are made online nowadays, but if you use a lender that requires payments via lockbox at a post office, they might charge you a fee for having that lockbox. 

Origination Fees

Done at loan closing, an origination fee is for evaluating and preparing the loan. Things like documents, notaries or attornies – these are all charges that can be carried over to the borrower via origination fees. Usually, they’re 0.5% of the loan amount. 

Prepayment Penalties

Prepayment fees are possibly the most seemingly irrational loan fees charged by lenders. If the point of a loan is to pay it off, why are they charging you for doing it early? The rationale behind prepayment penalties is that if you pay off your loan early, it isn’t generating as much interest, and therefore isn’t making the lender as much money. The prepayment penalty ensures they get all the money they would if you kept the loan to term. 

The good news, however, is that these loan fees are pretty uncommon with business loans (it’s more common for mortgages or car loans). Penalties are usually a percentage of the entire loan. 

Service/Processing Fees

Many of the loan fees in this list could classify as service or processing fees, but it’s just another term to look out for. They’re used to cover the cost of customer service or other services the lender may provide – like paperwork or administration. 

Unused Line Fee

The reason banks give out loans and lines of credit are to make money from them. If you have a line of credit from a bank and you’re not using it, then that’s not making the bank any money (typically, interest is only charged on the funds used from a line of credit). So, if you don’t spend over a certain amount of that credit line every month, the bank might charge you an unused line fee, which is often a percentage of the unused portion. 

Wire Fee

A wire fee happens when the lender is required to wire you the money via bank wire transfer, which is faster than the usual Automated Clearing House transfer. Since these are more expensive, however, that cost will sometimes be charged to you. 

What to do?

No to be presumptuous, but it’s likely that lenders will try to take advantage of any knowledge you don’t have about loan fees, and you could end up paying way more than you intended. Make sure you look out for these loan fees in contracts or agreements with lenders. You’re allowed to ask questions and negotiate some terms, so don’t be scared to bring it up when you’re getting a small business loan.

Have other concerns about small business loans and loan fees? Give us a call. FaaSfunds has qualified consultants to help with any financing needs you might have. Sign up 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:

Return on investment graphic

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.

ROI Shortcomings?

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.

                                       

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.

  1. 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).
  2. Location – where will your business be physically located? 
  3. Names and addresses of the owners (a.k.a. members). 
  4. 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.

Personal guarantees are meant to protect the lender. Similar to a co-sign, personal guarantors are individuals who sign on to a loan with a business, and if the business can’t pay back the loan, the guarantor is personally responsible. This means that a lender can require cash payment, or they can seize personal assets, depending on the type of guarantee. It’s a legal clause, and is a way to make sure the lender gets their money no matter what. A guarantor can be you, as a business owner and individual, or it can be someone else not directly associated with your business – this is called a co-signer.

Getting a loan is stressful, no doubt. Especially when you throw in all the clauses and jargon, it can be a complicated process. In this post, we’re going to break down what personal guarantees are, and what you should know about them. 

Personal Risks

Personal guarantees aren’t that uncommon, and some lenders require them. They’re also used for those with less-than-stellar credit or those who don’t bring in enough income or revenue to theoretically make the payments. You should be careful, though, if you’re asked to be a guarantor – it puts your personal finances at risk if the business you’re signing for defaults on their payments. 

This would also mean it affects your personal credit score, so it’s important to make sure that the business you’re signing for – be it your own or your business partner’s – will be worth this personal risk. Because ultimately, it is a risk for you, and a form of risk management for a lender. It’s advised you consult with a legal professional before signing anything, but especially if a business loan includes a personal guarantee. There are several different forms and executions of personal guarantees, so it’s important to read between the lines.

The Lender’s Perspective

Lenders are running a business, too. From their point of view, they are trying to minimize their losses and maximize their returns. The only way for them to do that is to get their money back, and by making you sign a personal guarantee, this increases the chance they’ll get paid back. It’s like a back-up plan.

Limited Personal Guarantees

Limited personal guarantees have a set dollar amount on what can be charged to the borrower if they default on their loan. These are usually used when multiple business partners are personally guaranteeing a loan, and they define each individual’s piece of debt if the business fails to repay. 

There are two types of limited personal guarantees you need to be aware of, and it’s advised you look over agreements carefully to distinguish which you’re dealing with. 

  1. Several guarantee – each individual knows at the beginning of an agreement the maximum they might owe, represented as a percentage of the loan. 
  2. Joint and several guarantee – this differs from a several guarantee in the sense that the percentages aren’t predetermined, and the lender can go after any individual guarantor to collect the full amount. This is especially dangerous because if your partner goes MIA after a business fails, you could be responsible for all repaying every penny. 

Unlimited Personal Guarantees

Unlimited personal guarantees mean that you’re agreeing to let your lender recover all of the loan in addition to any other fees associated with the loan, such as legal fees should the lender have to take legal action against you.

Unlimited personal guarantees offer the borrower, and thus the guarantor, essentially no financial protection if the business in question fails. 

SBA Loans

The SBA actually requires personal guarantees for their loans, but they call them “unconditional guarantees.” They require that individuals who have at least 20% equity in a company have to provide a personal guarantor, and they provide a form that details the stipulations of their unconditional guarantee. The SBA also warns that selling your company doesn’t get rid of your guarantee, and recommends waiting to sell your interest until you’ve fulfilled your guarantee, or your loan is paid off.  

Personal guarantees aren’t anything to be afraid of, but you should be aware of them. Like any loan, there will be risks, so it’s best to know about all your options. FaaSfunds can help with that – we’re here to show you the best loans for your financial needs, and to connect you with an advisor to help you make financing decisions. Sign up today.

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FaaStrak, LLC and affiliate FaaSfunds are software providers that exist to facilitate funding and help you make financial decisions for your business. The views, reviews, recommendations and suggestions expressed in our articles aren’t in any way affiliated with certain products or companies, and are based on the view of our editorial team alone, not FaaStrak, LLC as a whole. We do not take endorsements from products or companies mentioned above. We give advice based on research and industry knowledge, but the finance world is vast and variable, so we do not claim to be experts at everything within it. We are here to guide and provide direction, but are not here to enforce our knowledge as fact. We cannot be held liable for decisions made by you or your business. Under no circumstances should FaaStrak, LLC or any of its affiliates be liable for any indirect, incidental, consequential, or exemplary damages or loss of profits arising out of or in connection with your access of our site or software.