Monthly Archives: October 2017

The Most of Your New Business Loan

Congratulations! You’ve received the good news that many cash-strapped business owners long to hear: You were approved for a business loan.

Whether you’re getting a traditional bank loan or you went through an alternative lender, your newly acquired funds will no doubt help your business achieve goals, make important changes and continue growing. Your mind is probably racing with all the possibilities this money represents, but before the loan hits your bank account, you need to have a well-thought-out plan for what to do with the funds.

“This may be the end of the loan-application process, but it’s the beginning of what hopefully will be a growth-oriented and prosperous future,” said Michael Finkelstein, CEO of online lending platform The Credit Junction. “Judicious deployment of the new funds is critical to ensuring the business optimizes the new capital.”

Business financing experts shared their best tips to help new business-loan recipients properly manage the money they’ve received.

What you should do with your loan funds?
Put the money in a separate account. If you’re using your loan funds to cover ongoing operational expenses and purchases, you might want to place the money somewhere other than your primary business checking account. Essentially pretending the money isn’t there, and only transferring money as you need it, will prevent you from overspending, said Levi King, CEO and co-founder of business credit and financing company Nav (formerly Creditera).

“If you have to transfer money from one account to another — especially if it’s with different banks — you’ll think long and hard before you make that decision,” King said.

Set up automatic loan payments. Late or missed payments on your loan can really hurt your credit score, and make it more difficult for you to borrow money in the future. One way to ensure you stay on top of your loan repayment is by setting up automatic debits. Most lenders have an online banking system that allows you to do this, and as long as you know you’ll have the funds each month to make the payments, it will save you the hassle of manually moving your money around.

“[Auto-debit] helps ensure timely repayment and is one less thing for a small business owner to worry about,” said Mollie Gawronski, head of small business segment strategy for BMO Harris Bank. “In some cases, [banks can] offer better terms for customers who do that.”

Continue cutting costs and planning your budget. Don’t let that large bank-account balance go to your head: In the long run, continuing to save money, trim your budget and plan for your business’s future, even though you now have the funds to cover your expenses, will ensure you’re prepared for a financial emergency.

“Don’t assume that once you’ve got funding, you are all set,” King said. “Another big opportunity or problem can present itself tomorrow. Always be anticipating future funding needs, and look for opportunities to lower the cost of existing loans by refinancing for example.

Stephen Sheinbaum, founder of financial technology company Bizfi, noted that putting certain expenses like utilities on an equal payment plan, or looking into vendor discounts or early payoff plans can help you better manage your cash flow.

“Whatever savings you generate should go into your reserves,” Sheinbaum said.

Money mistakes to avoid
Spending just because you can. There are probably at least a dozen small expenses your new loan funds could help cover. You have a plan for the bulk of that money, and you may think spending $50 here or $100 there won’t throw off your financial strategy too much. However, those little costs add up, and before you know it, you could find yourself back in the position of being short on cash.

“Create good operational controls and checks and balances for cash monitoring and authority for release of funds,” Finkelstein said. “It is tempting, with an influx of cash, to add fixed costs, but many times this is not optimal.”

King agreed, and noted that any plans to spend the money should be run by someone else first, like your accountant or financial manager.

“It’s so easy to use [your loan] on things that aren’t going to move the needle,” King told Business News Daily. “Only spend when you need it … as slowly as possible, validating [the expense] along the way. A lot of times, projects and needs change.”

Crowdfunding Takes Off for Small Businesses

It’s been a four full months since the Title III equity crowdfunding provision of the Jumpstart Our Businesses (JOBS) Act went into effect, allowing small businesses and startups to raise up to $1 million annually in crowdfunded securities investments from both accredited and nonaccredited investors. As of Sept. 15, businesses had raised more than $7 million in capital investments using Title III.

Although Title III is a particularly young section of the JOBS Act, it’s been hailed as a potential game changer for small-scale financing. Whether a company’s projected growth is too flat to interest venture capitalists or an owner simply doesn’t want to end up beholden to one highly powerful investor, Title III is seen as a way to raise growth capital without sacrificing independence. Moreover, campaigns can be targeted at locals within a business’s community, helping to build a loyal customer base that maintains a stake in the company’s success.

“I think Title III will change financing. If you look at how the industry evolved in Great Britain when they did it, we’re already growing faster than they were,” Mike Norman, CEO of equity crowdfunding platform WeFunder, said. “It will take a little time, as any new securities legislation does. Awareness is the biggest challenge right now. A true test and the most compelling part is that we now have companies that have raised meaningful funds from investors. How can they activate those investors in terms of promotion and customer loyalty?”

WeFunder has tracked the growth of the equity crowdfunding industry so far, and the early statistics appear promising. More than 9,000 investors have contributed $7.14 million so far, helping to fund 29 successful offerings, three of which raised the full allotted amount of $1 million in capital. In just the past seven days, investors from the crowd have contributed $112,068 to small businesses.

For companies like stock-photography gallery Snapwire, which crowdsources made-to-order photos from over 300,000 photographers worldwide, leveraging the power of an already-engaged community led the company to immense success in its Title III equity crowdfunding campaign. In 72 hours, Snapwire had eclipsed its fundraising goal. Now, the company holds about 280 percent of its goal in investments.

“The very truthful reason we got into equity crowdfunding is that we struggled to raise capital from traditional [venture capitalists],” Chad Newell, CEO of Snapwire, told Business News Daily. “We were such a leader in doing this — nobody had run a successful campaign yet at the time. I had little expectations other than a fair degree of confidence that we’d be successful.”

For Newell, the key to success is about the market response to an idea, and Snapwire was lucky enough to have that 300,000-strong community of photographers who wanted to see the company succeed, he said.

“The crowd collectively makes the decision as to whether this is a good investment or not,” Newell said. “We’re 273 percent funded now, and we’re going for the full” legally permitted amount of $1 million.

Lending Right for Your Business

So, your company needs money that you currently don’t have. Maybe your business is just taking flight and is still lacking the necessary funds, or perhaps you have high aspirations with low profits at the moment.

If loans are your go-to choice for financing, you’ll need to decide between a traditional bank loan and an alternative lender. For the latter, peer-to-peer (P2P) lending might be a smart option if you’re looking for a smoother, faster borrowing process.

According to Investopedia, P2P lending lets individuals borrow and lend money without an official financial institution as the intermediary. Lenders collect income from interest, usually at a higher cost than with traditional loans, while borrowers access financing they may not have been approved for elsewhere.

“P2P loans can often offer higher approval rates and competitive interest rates — a stellar combination,” said Emily Bartz, a writer at NextAdvisor.com, which provides independent research and comparison tools for financial, tech and business products. “The beauty of P2P lending is that it offers borrowers a more personal experience by avoiding big banks and financial institutions. Plus, borrowers can rest easy knowing that their lender is accredited and provides legitimate loan support.”

Another upside, according to Bartz, is that P2P lending is flexible, allowing borrowers to complete the process in pieces.

Is P2P right for you?
So how can you determine if P2P lending is right for your business? Be sure to ask yourself these questions:

Is it legal in your state?
Not all states allow P2P lending. However, it may depend on the platform you use. For example, according to LendingMemo, 49 states provide funding through LendingClub, while only 47 do so through Prosper.

“Potential borrowers should make sure that P2P lending is legal in their state, as it is prohibited in some areas,” Bartz said. “You can usually find this information fairly easily on the lender’s website or by completing a quick Google search,” she noted.

Before committing to the idea, research which sites are accessible in your state.

How quickly do you need the loan?
One potential downside of P2P lending is that it might take longer than a traditional loan, thus hurting any immediate transactions or aspirations, Bartz said.

Bartz said that “if you are in a time crunch, P2P lending might not be ideal.” Make certain that your company’s needs are in tune with the time frame of your lending process before settling, she advised.

Is your financial standing good enough?
Bartz noted that it’s important to consider costs such as interest rates and origination fees. While not all P2P lenders require this, it’s smart to determine whether your credit score is high enough, and your business makes enough money, for you to be approved.

“It’s crucial that all potential borrowers have a clear understanding of exactly what they’ll be paying and have a plan to keep their payments consistent and on time,” she told Business News Daily.

Stretch Your Startup Dollars

Initial startup costs are some of the biggest expenses a new business owner will have to encounter. Before you turn a profit, there are many parts of the business that need to be covered up front, and entrepreneurs don’t always anticipate some of these expenses.

To reduce your startup costs and stretch your dollars a little farther, follow these tips.

Have a budget, and stick to it
A simple way to save money as a new business owner is to set spending and expense limits. However, a surprising number of business owners don’t have a formal budget, said Carissa Reiniger, founder of small business support community Thank You Small Business.

“There is so much power in knowing what is going on in your business, for better or for worse,” Reiniger told Business News Daily. “Managing the finances of my business is not something I naturally enjoy, so I’ve put rules in place to help me stay on track. I advise setting up a standard time every week or month for reviewing and managing your budget.”

Angie Segal, an ActionCOACH business coach, advised entrepreneurs to factor their own salary into the budget as soon as possible.

“When you don’t pay yourself, you take money out of the business elsewhere to cover your own expenses,” Segal said. “Giving yourself a salary forces you to make everything in your budget work.”

Thatcher Spring, CEO of GearLaunch, said entrepreneurs should always do as much as possible with what they have before they add more fixed costs.

“At my company, we only hire when there is too much for the current staff to reasonably accomplish without additional help,” he said. “I’ve also found that hiring less-experienced, smart, adaptable employees, instead of only those that are senior and highly experienced, can help keep salaries under control.”

Be flexible
When you created your business plan, you might have envisioned all of the latest office equipment, lavish holiday parties and enough staff to take on big projects. However, not all of those business luxuries are guaranteed.

Office Evolution founder and CEO Mark Hemmeter said small business owners can suffer from a lack of flexibility in their grand plans.

“Your ego and vanity can get in the way,” he said. “You want that car or that perfect sign, but it just isn’t a good fit for the core of the business.

Hemmeter recommended looking into short-term solutions, like using shared office spaces and hiring freelance workers, until you can afford to make long-term commitments such as acquiring private office suites and hiring full-time employees.

Spring added that business owners should always plan for every effort to take longer than expected, whether it’s launching a new website, signing up customers, sourcing new products or hiring employees.

“Make sure you always set aggressive goals, but realize that there will be unexpected terrain on the pathway to success,” he said.

What You Need to Know

Startup financing is a huge consideration and an important decision for any aspiring entrepreneur. There are plenty of ways to fund a business, and whether you borrow money, dip into your savings or go another route, you need to understand your options before you choose.

While these are far from the only ways to finance your startup, here are three of the most popular methods today’s entrepreneurs choose.

Borrowing
Traditional bank loans
The notoriously high rejection rate of bank business loans combined with the proliferation of online lenders has made traditional business lending seem like it’s not even worth the time and effort. But plenty of small business owners still turn to local and national banks, as well as the Small Business Administration (SBA), to help them finance their operations.

“There’s still a lingering perception out there that banks aren’t lending, but that’s not true,” said Jay DesMarteau, head of regional commercial specialty segments at TD Bank.

“Traditional bank loans typically offer better terms and build credit, but the arduous [process] that comes along with this type of financing often overextends time-to-credit necessary to meet the small business’s needs,” added Matt Schaffnit, CFA, co-founder and COO of Lending Technologies Corp.

Alternative lending
Alternative lenders provide quicker, smaller, more flexible loans through an online application and transfer process. Depending on your credit score, you can be approved for a loan in a matter of minutes and have your money in just a day or two.

While having all these options can be great for businesses that may not qualify for a traditional bank loan, it also means you’ll need to be much more diligent about researching potential lenders and their reputations. Sabrina Parsons, CEO of Palo Alto Software, said that although online lenders will make a lot of promises about their funds, some are just “sharks” out to take advantage of small business owners.

“These sharks will charge business owners to ‘qualify’ for a loan and to have access to their lenders,” Parsons said. “[Also, some alternative] loans can come at a very high interest rate, and business owners need to understand the implications of these types of loans.”

Important Business Trends to Watch

Financing has always been a big challenge for new startups. But as evidenced by the growing number of Kickstarter success stories, the business world is learning how effective it can be to raise money through small contributions from a large number of people.

As the popularity of crowdfunding continues to skyrocket, more startups and small businesses are taking advantage of the various trends that emerge in this space in the coming years. Here are three big ones to watch.

Crowdfunding will remain a popular funding choice
In years past, crowdfunding for businesses was a novelty, a rare exception to the traditional methods of bank loans, venture capital and borrowing money. Today, announcing your crowdfunding campaign is just as common as any of these other options, if not more so. In fact, Forbes reported that in 2016 crowdfunding is expected to surpass venture capital as a means of financing.

“Many major news organizations are now highlighting noteworthy campaigns,” said Bill Clerico, co-founder and CEO of WePay, a payment service provider for crowdfunding, marketplace and small business platforms. “That’s not just good for the campaigns, but it also normalizes the behavior and leads to more people [giving to] crowdfunding [campaigns].”

Nonprofits will benefit more from crowdfunding
While businesses in any industry can use crowdfunding, the nonprofit and charity sector has particularly benefited from the growth of this financing method.

“This entire industry is being disrupted with the introduction of crowdfunding of donations,” said Anisa Mirza, CEO and co-founder of charity crowdfunding platform Giveffect.

“Charities are seeing a twofold benefit from crowdfunding,” Clerico added. “First, it’s proven to be an extremely efficient way to solicit and manage donations compared with other methods. Second, the additional social and viral potentials of crowdfunding campaigns can give smaller charities a cost-effective way to create awareness for their cause.

Equity crowdfunding will grow
In 2012, Congress passed the Jumpstart Our Business Startups (JOBS) Act to bring equity crowdfunding to the forefront. After three years of being stalled, the final provisions of this multipart bill were approved in 2015, and made it possible for small businesses nationwide to raise money through equity crowdfunding, even across state lines.

In an interview about Title IV of the JOBS Act (also known as Regulation A+), Alex Feldman, CEO and founder of crowdfunding review site CrowdsUnite, told Business News Daily that the rule will allow a much greater percentage of private startups to receive investment money. He noted that investments in small, community businesses, such as local restaurants or boutiques, will be driven by customers who want to keep those businesses running.

“This will be a huge shift in the traditional funding paradigm that will change how small businesses raise money,” Feldman said.

For more information on direct public offerings through equity crowdfunding, see this Business News Daily article.

Tips for new crowdfunders
If you’re hoping to launch a crowdfunding campaign in the near future, you should read the fine print on the platform or site you want to use, Mirza advised. Not all crowdfunding platforms are created equal, and before you launch a campaign or make your account, you should know the ins and outs of the site.

“Truly understand the platform you are choosing,” Mirza said. “From traditional crowdfunding venture firms like Brightspark to platforms like AngelList, or even general platforms like Indiegogo and Kickstarter, there is a myriad of options. And chances are there is one that is better than others for your startup.”

You’ll also need a solid marketing plan to get your campaign off the ground.You may have a great idea that people are willing to fund, but if they don’t know about it, you’ll never see a dime of their money. Clerico reminded campaigners that crowdfunding is a challenging marketing exercise, and you need a strong, well-executed plan to raise the capital you require.

“Calculate how many people need to give at a specific amount to achieve your goal, and then devise a marketing plan to reach that many people,” Clerico said. “Be sure to identify early champions, those who can rally their network to help you reach your goal. Reaching out to media outlets and blogs can help your campaign get distribution as well.”

Jonathan Wilson, an attorney at Taylor English law firm, said he agreed: Although communicating with potential investors is easier than ever before, you need an organized campaign to make it work, he said.

“Campaigns fail that don’t have their business plans fully baked before they launch,” Wilson said. “Invest the time to complete a business plan and all of the related contracts before trying to tell [your] story through crowdfunding.”

While crowdfunding may never fully replace traditional funding options, Clerico said he believes small businesses, especially those outside of the tech industry, will continue to benefit tremendously from this method of raising capital.

Affordable Cities for Startups

For the second year in a row, cities in the South give entrepreneurs the best chances to keep their startup costs low, while big cities remain among the most expensive places to start a new business, new research finds.

The study from SmartAsset revealed that nine of the 10 cheapest cities to start a new business in are in southern states, including three in Tennessee.

To find the cities with the lowest startup costs, SmartAsset collected data on the typical costs of starting and running a business in 80 of the largest cities in the United States. They calculated the total expected startup costs over the first year of operation for a company based on five factors:

1,000 square feet of office space.
The cost of gas and electricity for a 1,000-square-foot office.
The average cost of filing fees for either incorporation or filing as an LLC.
Legal and accounting fees.
Payroll costs for five full-time employees, earning the city’s median annual salary.
Topping this year’s rankings of the most affordable cities for startups is Chattanooga, Tennessee. The city is attractive for entrepreneurs looking to save money because of its relatively low costs for office space and employee payroll. The research shows that it would cost $225,442 for a business owner with five employees and a 1,000-square-foot office to run a first-year startup there. That’s up about 2 percent from a year ago when the costs were $221,000.

“If you decide to start a business in the Gig City, you’ll be in good company,” the study’s authors wrote. “Many startups and accelerators operate there, including the Lamp Post Group and Gigtank 365.”

Overall, the 10 most affordable cities to launch a startup in are:

Chattanooga, Tennessee: $225,442
Wichita, Kansas: $232,057
Greensboro, North Carolina: $232,326
Columbia, South Carolina: $232,541
Knoxville, Tennessee: $232,620
Little Rock, Arkansas: $233,877
Memphis, Tennessee: $234,524
Lexington, Kentucky: $234,945
Orlando, Florida: $236,513
Winston-Salem, North Carolina: $237,983
Similar to a year ago, many of the 10 most expensive locations for startups are larger cities, including three in northern California: San Jose, San Francisco and Oakland.

For the second year in a row, San Jose and San Francisco are ranked as the two costliest cities to launch a business in. San Jose, where costs rose 3.9 percent from 2015, has the most expensive payroll and legal and accounting costs of the 10 cities with the highest startup costs, while San Francisco had the third highest office space and legal and accounting costs and second highest payroll expenses.