Watch the video below or scroll down to read the recap
This workshop covers the Positives and Pitfalls of Online Funding for Small Businesses in conjunction with the U.S. Small Business Administration.
You can download the workshop slides by clicking on the below PDF.
Key Notes from the Presentation:
Fintech
A Fintech is any app, software, or technology that allows people or businesses to digitally access, manage, or gain insights into their finances or make financial transactions. These tools can include online banking and payments with traditional financial institutions or a lender, with no physical locations, retirement planning, management, and lending.
Banking
Payments
Retirement Management
Embedded Finance
Lending
Fintech Pros & Cons
Pros: Inclusive, Lower some fees, Confidence
Cons: Can be predatory, Confusing, and Less regulation
Persistent Capital Access Gaps
Most Impacted: Rural, Minority-owned, Women-owned, and those seeking small-dollar loans
New rules:
Grant permanence to SBA’s program for nonprofit mission lenders,
Remove outdated limits on non-depository lender participation,
Increase opportunities for employee ownership, and
Modernize the credit criteria and underwriting standards for a wider lending network and small-dollar loans.
Check out this Press Release from the SBA: U.S. Small Business Administration Implements Rules to Address Persistent Capital Access Gaps | U.S. Small Business Administration (sba.gov)
Digital Lending Facts
Online business loans are a legitimate way to get financing for your business, but they're best for business owners who can't qualify for a bank loan or need capital fast. Here are some quick facts about Digital Lending:
All online lending $7B in 2022
Expected to grow by 26.5% by 2030
Top 5 SBA Lenders
Live Oak Banking Company #1,157, Amount: $1.7B, Average Loan $1.5M, Location: Online
Newtek Small Business Finance #1,677, Amount: $1.1B, Average Loan $604k, Location: Online
The Huntington National Bank #5,666, Amount: $996M, Average Loan $176k, Location: Regional
Celtic Bank Corporation #707, Amount: $646M, Average Loan $914k, Location: Regional
TMC Financing #496, Amount: $626M, Average Loan $1.2M, Location: Online
Direct Lending vs. Brokering
Some online business or personal loan sites are loan brokering sites. You will not immediately know that you’re working with a brokering company. These sites will take your information, possibly do a soft credit pull, and then share your
information with its network of lending partners. A well-known company that does this is Lendio. Here are a couple of things to note:
There is a commission as a percentage of the loan amount paid by the lender, normally 1% to 2% if working with a Broker. That commission cost is then passed along to the borrower.
SBA also has a service called Lender Match which is commission-free.
Brokered Lending Pros & Cons
Pros: Explore multiple options, Quick, and Can help find the right product
Cons: Extra & hidden fees, Don’t know who you’re dealing with, and Poor Customer Service
Peer-to-Peer Lending Facts
Peer to Peer Lending is considered a form of crowdfunding. Here are a few quick facts on Peer to Peer Lending:
One report estimates $274B in 2021, and an increase during 2022 to $407B. It’s estimated to be $1.3 Trillion by 2031.
This is worldwide, but the United States has taken up most of the space according to trend.
How Peer-to-Peer Lending Works:
The lender is a “peer" or a group of individuals, that is not a bank or other financial institution. The platform will serve as a conduit between a borrower and a group of small investors. In the past, these have been personal loans, but more and more are business loans today. Also today “peers” are not only small investors but also institutional investors and high-net-worth individuals.
Terms
There are several common characteristics of terms for peer-to-peer lending...
Your rates depend on your credit score. The higher your score, the less funding will cost you.
Digital rates range from 5.24% up to 38%.
They normally offer fixed rates
The length of the loan varies, usually from 6 to 60 months
All lenders charge an Origination Fee
For business loans, platforms require financial accounts and a track record
Types of Peer-to-Peer Lending Companies
Prosper
Amounts range from $2k to $35k
Offer Personal Loans
Terms are between 3 and 5 years
APR is 7.95%–35.99%
Credit Score required is at least 630
Loans can be processed in as little as 5 days
No collateral is required
Prosper has been around since 2005
Upstart
Amounts range from $1k-$50k
Offer Personal Loans
Terms are between 36 or 60 months
APR is 4.66%-4.66%
Credit Score required is at least 620
Processed in as little as 1 day
Origination Fee of 1%-5%
Funding Circle
Amounts range from $25k-$500k
Offers Small Business Loans
Terms are between 12, 24, 36, 48, or 60 months
APR is 5.49%-27.79%
Unsure of Credit Score requirement
Processed in as little as 72 hours
Origination Fee of .99%-5.99%
Lending Club
Amounts range from $40k for personal loans | and up to $500k for business loans
Offer personal and small business loans
Term Per: 24, 36, 60 months | Business is 1-5 yr.
APR is 5.99%-34.34%
Unsure of Credit Score requirement
Processed in as little as 7 days
Origination Fee of 1%-6%
Peer-to-Peer Lending Pros & Cons
Pros: Quick, Lower Score, More Choices
Cons: Smaller Amounts, Higher fees, Higher APR
Accounts Receivable Financing: Pledging & Factoring
If you're already in business, you have the option of selling your accounts receivables to raise money for working capital needs, which is called Pledging. Factoring, however, is selling your accounts receivable to a third party. The third-party, or “Factor," usually pays about 80 percent of the value of the receivable upfront. For example, if you sell a $100 invoice to a factor, you'll be paid $80 immediately. The factor then collects payment from your client when the invoice is due, deducts its fees (2-6% of the total invoice), and forwards the rest of the cash to you. So, if you agreed to pay a factor 5%, the total amount you would collect on your $100 invoice would be $95. If your credit is not great, it likely doesn’t matter as Factors are more interested in the creditworthiness of your customers. There are also typically no long-term contracts involved. If you pursue this route, be sure to build in a profit margin, at least 25%.
Factoring Pros & Cons
Pros: Cash Flow, High chance of approval, and No collateral
Cons: Cost, Loss of control, and Liability for unpaid invoices
Business Cash Advances
Business Cash Advances are made to your business based on the volume of your business’s monthly credit card transactions. These were originally called merchant cash advances. Here are several notes on Business Cash Advances:
Businesses usually receive an advance of up to 125% of their monthly transaction volume averaged over the previous 120 days.
Terms will vary from lender to lender.
The best candidates for these are businesses with strong credit card sales like retail and restaurants.
Business Cash Advances Pros & Cons
Pros: Quick, Easy, Credit Score not important
Cons: Expensive, Short term solution, Risky
Types of Leasing
Finance Lease
Planned ownership to be transferred to the lessee
Risk transfers to the lessee
Total lease payments = leased asset’s FMV+
Pros: Will have full ownership, Less initial cash outlay,
Cons: Can be easily repossessed, considered debt
Operating Lease
Simple rental contract
No ownership rights transferred
Lessee/Lessor relationship
Operating expense
Pros: No debt added to the company, Guaranteed lease for buyer
Cons: Firms with high-cost fixed assets, Considered investment by buyers
Sales Leaseback Lease
Used to raise working capital
Former owner becomes the lessee
Businesses with high fixed assets
Not common among small businesses
Pros: No debt added to company, Guaranteed lease for buyer
Cons: Firms with high-cost fixed assets, Considered investment by buyers
Rewards Crowdfunding
What it can do for you:
Access to flexible financing
Build buzz about a new product/service
Expand your following/potential customers
Funding Models
There are 2 funding models (how you get paid): All or Nothing/Fixed versus a Flexible model.
All or Nothing example: Have a fundraising goal of $5,000 and have only raised $4,000 by the end of your campaign. In an All-or Nothing model, you will not receive any funds once your campaign is complete since you did not meet your goal. Kickstarter is a good example of this.
Flexible example: If you raise $4,000 on a $5,000 goal, you would still be allowed to keep the $4,000.
Typically All-or-nothing campaigns are funded at twice the rate as campaigns that use the Flexible funding model.
Go Fund Me
Donation based
Flexible
2.9% + $0.30 (includes credit card processing)
Personal and charity
30% for medical expenses
Business fundraising accepted
120M donors for $9B
Kickstarter
Rewards
Fixed Only
5% + 3-5% credit card processing
Best for creative projects
21 M donors for $7.2B
40.47% success rate
IndieGoGo
Rewards
Fixed & Flexible options
Platform Fee 5%
Transaction Fee 3% + $0.20
Success rate 9%
650k projects for $18
Prior to Your Campaign think about
Branding- have all marketing materials and branding in place
Target Marketing- know your target audience and the customers you're trying to reach
Manufacturing Fulfillment- have your manufacturers lined up and be aware of fulfillment timelines
Shipping/Delivery- decide on the methods you will use and their feasibility
Financial Savvy- you need to be financially savvy to make this a profitable project
Keys to Success
Amount Requested Below $10k - The majority of successful campaigns were over $1,000 but below $10,000.
Project Games, Design, Tech - The most successful project are those for Games, Design, and Tech.
Video - Create a Compelling & Authentic video explaining your campaign.
Length 30 Days - According to Kickstarter itself, the best campaigns last only 30 days
Rewards/ Product or Exclusivity - You will need a valued reward. The best rewards offer something valuable to the supporter at a reasonable price. The value could be an actual product, input in the project, or some sort of exclusivity.
Existing Network Conversions - A lot of your success is going to depend on the network or potential supporters you may already have. Successful crowd funders talk about how important their network or community is, especially those from previous projects. Typically, only 3% of your existing network will participate in any given project/campaign so that is incentive enough to ensure they feel appreciated. Remember that you should be communicating regularly with your network to get people excited prior to launching.
Reward Structure
You need to be aware of how you structure the rewards as it can impact your success or failure. Think on...
Limited Levels - if you offer too many rewards, supporters may get overwhelmed
A variance of Reward Levels - ensure you have varying types of reward levels for folks who may want to support you on different levels
Past Success = Fewer Rewards - Businesses with more crowdfunding experience can typically offer fewer rewards because they’re viewed as more legitimate and trustworthy,
Rewards Crowdfunding Pros & Cons
Pros: No collateral, No credit check, Customer base
Cons: Small Amounts, Could forfeit money, Competitors
To see several crowdfunding campaign examples, go to minute marker 35:37 on the above video.
Equity Crowdfunding
The platform must be registered/operated by a registered broker/dealer.
Interstate v. Intrastate - Intrastate equity crowdfunding has to a greater extent been exempt from SEC rules. So, you may want to see if there is a state-based platform available that could conceivably come with fewer strings attached. However, there are still requirements to keep these platforms and businesses outside of the federal purview. The principal place of business should be in-state and sales are only to in-state residents, etc. The rules get quite specific.
Additional things to know:
Crowdfunding investments can only be made through an online platform operated by an intermediary, which is a registered broker-dealer or funding portal.
A company is permitted to raise a maximum of $1,070,000 in a 12-month period.
Individual investors are still limited in the amounts they are allowed to invest
Keep in mind that your state could be more stringent than the federal guidelines.
The main difference between equity crowdfunding and more traditional models is that rather than establishing a one-to-one relationship, it is offered to a wide range of potential investors.
Investors’ rights can vary. You should consider how much of the control rights over your business you want to give to external shareholders. Also, be aware that investors may claim damages to compensate for money loss incurred. You will have to set the terms, and choose how much you want to sell, the price, and how investors will be rewarded.
The fees payable for raising equity finance on a platform will typically be a success fee and legal or administrative fees.
You need to show that your business is investment-ready. You will need to produce a business plan and financial forecasts.
You should also have a good communication strategy, with key information about the project readily available to potential investors.
Due diligence- This is carried out by the platform and the investor may have the option to ask for more information. You should be prepared to provide this information even if it comes at an additional cost. You should have a business valuation. There are other serious legal aspects, such as disclosure and legal documents, annual general meetings with shareholders, processing corporate rights, annual reports, and decision procedures.
How Much Equity Should I Give Up
Typically = 20-40%
Formula below
Investment $ ÷ Business Valuation = % Equity
$200,000 ÷ $1,000,000 = 20%
Equity Pros & Cons
Pros: Potential for Money, Alternative to IPO, Access to more investors
Cons: Expensive, Giving up control, Need to know federal regulations
Beware of Predatory Lenders
Warning Signs:
Interest rates significantly higher
Fees more than 5% of loan value
Doesn’t disclose the annual percentage rate
Doesn’t disclose full payment schedule
Asked to lie on paperwork
Asked to leave signature boxes blank
Compare competing offers and consider speaking with a financial planner, accountant, or attorney before signing for our next loan.
Contact
Twitter: @SBA_WV
Phone: 304-623-5631, to reach our presenter, Kimberly, dial 304-347-5220 or you can email her at Kimberly.Donahue@sba.gov
Let's Get in Touch!
Jim Spencer, Executive Director Bluefield WV Economic Development Authority | jspencer@bluewv.org | (304) 902-2332 x 2405
Faith Blackwell, Administrative + Marketing Assistant
Bluefield WV Economic Development Authority | fblackwell@bluewv.org | (304) 902-2332 x 2408
