From purchasing office supplies to taking staff out for dinner or traveling to events, nonprofit organizations have plenty of reasons to sign up for a credit card. And, because a nonprofit is technically a business, it may make sense to apply for a business-specific credit card. Consumer cards can work, if you use them correctly, but business credit cards usually offer rewards and benefits that better suit professional organizations.
There are also credit cards out there designed specifically for nonprofits. Depending on your location and your organization’s situation, you may find that one of these credit cards will actually work better for you than a business-centric card.
Curious to find out what’s out there in the world of credit cards for nonprofits? Take a peek below to find out which business credit card might work best for your nonprofit organization.
Best Credit Cards Designed For Nonprofits
While they may not be the most common type of credit cards, cards built for nonprofits do exist. The most notable thing about these cards is that they require no personal guarantee from applicants. This means that the card issuers won’t look into the personal credit history of individuals listed on the application; instead, they’ll simply consider the organization’s financial records. Let’s take a deeper look at a few credit cards designed from the get-go for nonprofits:
Charity Charge Nonprofit Business Card
Charity Charge is an issuer dedicated to helping nonprofits thrive. Besides its nonprofit business credit card, Charity Charge offers other cards that automatically donate cash back to a nonprofit of the user’s choice.
This co-branded Mastercard, meanwhile, was designed from the ground up for nonprofits to spend with. First appearing in the summer of 2019, the Charity Charge Nonprofit Business Card could make a solid option for your organization. There simply aren’t many credit cards dedicated to working for nonprofits — and certainly none of the others come from a company built around giving back to such organizations.
Besides requiring no personal guarantor, this card will generate 1% cash back on all of your purchases as an automatic rebate to your monthly statement. Going beyond rewards, Charity Charge promises online expense reporting and card management, dedicated customer service, and fraud protection. Charity Charge also markets this card to schools and associations.
U.S. Bank Community Card
In partnership with Mastercard, U.S. Bank offers its community card for nonprofit organizations. With this card, you’ll be able to apply without needing a personal guarantee. U.S. Bank also offers an online tool to analyze your organization’s spending. Plus, employees can get their own cards for free.
When it comes to rewards, you have two options. You can either pay $99 per year and gain access to 1% cash back on all purchases. Or you can choose to pay no annual fee — but you also eschew rewards. It’s also worth noting that going the annual fee route opens up the possibility to earn points for taking credit card payments and making purchases with U.S. Bank’s Encore Relationship Rewards program.
Unfortunately, you’ll need to live near a U.S. Bank location because you must apply in person for this credit card. While the bank operates in over half the states in the U.S., if you don’t live in Ohio or further west, there probably isn’t a U.S. Bank near you.
Visa CommUNITY Card
Introduced by Visa several years ago, the Visa CommUNITY Card is available at local banks and community credit unions throughout the country.
Because this card is issued through various banks, the exact terms may vary from location to location. You’ll generally be able to earn rewards for this card (usually either 1% cash back or 1 point per $1 spent) and the annual fee is low ($99 per year) or nonexistent. You’ll also be able to access high credit lines. Like the above two cards, no personal guarantee should be required when applying.
You’ll likely need to apply in person for a Visa CommUNITY Card. Several banks and credit unions issue this card, so you might be able to find a location near you. Issuers include:
Bangor Savings Bank (Maine and New Hampshire)
bankHometown (Massachusetts)
Beacon Credit Union (Indiana)
First County Bank (Connecticut)
Fulton Bank (Delaware, Maryland, New Jersey, Pennsylvania, and Virginia)
PCSB Bank (New York)
Shelby State Bank (Michigan)
South State Bank (Georgia, North Carolina, South Carolina, and Virginia)
Sunrise Banks (Minnesota)
United Community Bank (Georgia, North Carolina, South Carolina, and Tennessee)
There are also a number of other banks that offer a Visa CommUNITY Card, so be sure to call around locally if none of the above financial institutions are near you.
Best Business Credit Cards For Nonprofits
Unfortunately, it’s pretty slim pickings when it comes to credit cards designed specifically with nonprofits in mind. Because of this, you may find it better to apply for a business credit card that offers a set of rewards, benefits, interest rates, etc. that best suit your organization. Here are a few of our favorite business credit card picks for nonprofits:
Best For No annual fee
Spark® Cash Select From Capital One®
Compare
Annual Fee:
$0
Â
Purchase APR:
14.49%-22.49% (variable)
Required Credit: Excellent
Welcome Offer: $200 cash back if you spend $3,000 in the first 3 months after opening your account
Intro Purchase APR: 0% APR for 9 months
Intro Balance Transfer APR: N/A
Foreign Transaction Fee: 0%
Rewards:
Unlimited 1.5% cash back
Featured Benefit:
Zero fraud liability if your card is lost or stolen. Plus, get automatic fraud alerts via text, email, or phone call.
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No one likes an annual fee. While paying a yearly charge is often a requirement of some higher-tier credit cards, there are a few solid options without one. Spark® Cash Select from Capital One® is one such option.
The Spark Cash Select card features a strong 1.5% cash back on all purchases. What’s most impressive about that rewards rate is that there’s no cap on how much you can earn. You’ll also be able to take advantage of a 0% introductory APR rate for your first nine months, free employee cards, and a welcome offer worth $200. The card also includes other standard credit card perks like extended warranty and fraud protection.
Best 0% APR introductory period
Blue Business Cash⢠Card from American Express
Compare
Annual Fee:
$0
Â
Purchase APR:
14.74% – 20.74% (variable)
Required Credit: Good
Welcome Offer: None
Intro Purchase APR: 0% APR for 12 months
Intro Balance Transfer APR: 0% APR for 12 months
Foreign Transaction Fee: 2.7%
Rewards:
2% cash back on all eligible purchases on up to $50,000 per calendar year, then 1%
Featured Benefit:
Spend beyond your credit limit with Expanded Buying Power (Just remember, the amount you can spend above your credit limit is not unlimited. It adjusts with your use of the Card, your payment history, credit record, financial resources known to us and other factors.)
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If you know you’ll be carrying a balance right off the bat, going with a credit card that has an introductory rate period could be a great possibility. When a card has an intro rate period you won’t have to pay interest until the period is up. The Blue Business Cash⢠Card from American Express has one of the longest intro rate periods for business credit cards at 0% APR for the first 12 months.
Outside the 0% intro rate, you’ll be able to nab 2% cash back on the first $50,000 you spend every calendar year (the cash back rate drops to 1% after passing the $50,000 threshold). There’s also no annual fee and Amex allows you to spend above your credit limit. Otherwise, standard credit card features come along for the ride, such as extended warranty and purchase protection.
Best For Travel
Chase Ink Business Preferredâ
Compare
Annual Fee:
$95
Â
Purchase APR:
17.49% â 22.49% (variable)
Required Credit: Excellent
Welcome Offer: 80,000 points if you spend at least $5,000 within the first three months of opening your account
Intro Purchase APR: N/A
Intro Balance Transfer APR: N/A
Foreign Transaction Fee: None
Rewards:
3 points per $1 spent on the first $150,000 in combined purchases on travel, shipping purchases, internet/cable/phone services, and advertising purchases made with social media and search engines each account anniversary year
1 point per $1 on all other purchases
Featured Benefit:
Points are worth 25% more if redeemed for travel via Chase Ultimate Rewards
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Should your organization require frequent travel, finding a credit card with travel rewards and perks may be wise. One of the most well-rounded travel cards on the market is Chase Ink Business Preferredâ .
This card has a nifty rewards scheme — you’ll net 3 points per dollar spent on travel, shipping, internet/phone/cable services, and advertising. You can then redeem those points for 25% more when booking travel through Chase’s own online portal or you can transfer them on a 1:1 basis to an array of travel partners. In terms of perks, Ink Business Preferred promises trip insurance, extended warranty, and cell phone protection.
Best For Low Credit Users
Spark® Classic from Capital One®
Compare
Annual Fee:
$0
Â
Purchase APR:
24.49% (variable)
Required Credit: Fair
Welcome Offer: None
Intro Purchase APR: N/A
Intro Balance Transfer APR: N/A
Foreign Transaction Fee: None
Rewards:
Unlimited 1% cash back
Featured Benefit:
Zero fraud liability if your card is lost or stolen. Plus, get automatic fraud alerts via text, email, or phone call.
More card details (click to expand)
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If you or your organization lacks a strong credit history — or doesn’t have one at all — the Spark® Classic Card from Capital One® might work best for you. Designed for credit-building users, this card can help you strengthen your credit — allowing you to eventually graduate to a better credit card down the line.
Even though Spark Classic was constructed for those with weaker credit, it still comes with some decent perks. Its 1% cash back will see you earning rewards at a nice clip. Beyond that, the card comes with other standard benefits like free employee cards, no foreign transaction fee, and extended warranty.
Didnât Find What Youâre Looking For? Check Out Our Other Resources For Nonprofit Organizations
If a credit card isn’t the next step for your organization, Merchant Maverick has a few more tools that can lend a hand. In case you’re curious about the difficulties nonprofits face when it comes to financing, check out our guide to loans for nonprofits. Organizations in need of a grant may find our in-depth article on grants helpful. Or, if you’d like to try raising funds with a more modern approach, read up on crowdfunding for nonprofits.
The post The 7 Best Business Credit Cards For Your Nonprofit Organization appeared first on Merchant Maverick.
Nonprofit organizations are responsible for doing so many amazing things, from combatting hunger and homelessness, to helping sick children and animals. But no one said saving the world was easy. While there are multiple steps to registering a business, you have to jump through even more hoops if you want to register a nonprofit business. Still, officially registering as a nonprofit is important because it legitimizes your organization and provides it with some distinct advantages. In particular, nonprofits registered as 501(c)(3) organizations have a tax-exempt status, which means they do not have to pay federal or state income tax.
Whether you want to start a nonprofit or have already begun your nonprofit, it’s important to make sure your organization is properly registered, compliant, and set up for success. Read on for an actionable, step-by-step guide to help you make your nonprofit official.
Why Register As A Nonprofit?
It is possible to informally operate as a nonprofit organization without officially registering as a nonprofit. However, until you make it official, you are basically turning away free money, as well as other benefits.
Here are the main reasons to register your nonprofit:
Legal Protections: Nonprofit corporations have limited liability protection, which protects directors and members from being held personally responsible for the organization’s debts or liabilities. The nonprofit is considered a separate entity that can enter into contracts, sue or be sued, take out business loans, etc., without anyone who works for the nonprofit being held personally liable.
Tax Benefits: Once you have your federal and state tax-exempt status, your organization will be exempt from paying income tax. There are also tax benefits for donors, who can deduct donations made to 501(c)(3) organizations on their taxes.
Access To Grants: Many business grants are only available to organizations registered as nonprofits.
Access To Discounts: With proof of your nonprofit status, your organization is eligible for various discounts, such as USPS nonprofit discounts and credit card processing discounts for nonprofits.
Crowdfunding Eligibility: 501(c)(3) status lets you raise money through certain nonprofit crowdfunding platforms, such as CrowdRise. Some crowdfunding platforms will also eliminate platform fees for registered nonprofit entities.
Credibility: An official nonprofit status lets people know your organization is legit and not just a bunch of yahoos or even scammers. Obtaining your nonprofit status is likely to attract more donors and larger donations.
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The 8 Steps You Need To Take To Get Started
The process to execute some of these steps varies somewhat from state to state. For example, in some states, you will need to apply for both federal and state tax-exempt status. But wherever you live, you will need to follow all of the below 8 steps.
1. Select A Name
Though you may have a working name for your organization, to make your nonprofit official, you will have to make sure that name is available and hasn’t already been trademarked. After you choose your name, check with your Secretary of State office as well as the U.S. Department of Commerce website to ensure that it is available. You can normally pay a nominal fee to reserve your name until you file your articles of incorporation.
2. Form Your Board Of Directors
Generally, you should form your board of directors before incorporating. Some, but not all states require that you list your board members’ names in the incorporation documents. You’ll also need to list at least three directors when you file for your 501(c)(3) tax-exempt status. These members should ideally be unrelated (by blood or marriage). Â
3. File Articles Of Incorporation
This is the documentation that forms an official corporation for your nonprofit and will be filed with your secretary of state. It includes information such as your organization’s name, location, board of directors, and purpose (what your nonprofit is being created to do/provide). Although incorporating your nonprofit does not make it tax-exempt, you will need to include certain language in the articles of incorporation for when you apply for tax-exempt status later—your state’s nonprofit formation packet should include the required information.
Some states also require you to publish a notice of incorporation with your local newspaper.
4. Write Bylaws
After your articles of incorporation have been approved, you can write your bylaws. These are your nonprofit’s internal rules and guidelines for procedures such as holding issues, voting, and electing officers. You will need to include a copy of your bylaws in your 501(c)(3) application.
5. Hold First Board Meeting
At your first board meeting, you will make your articles of incorporation part of the official record, adopt your bylaws, and elect officers. Someone will need to take minutes, which you will keep on file. It’s recommended that you hold this initial board meetingbefore you file for federal tax-exempt status. In a later meeting, you can record the receipt of federal and state tax exemptions.
6. File For EIN
The final thing you need to do before filing for your 501(c)(3) status is to apply for an Employer Identification Number (EIN). You need to do this even if you don’t have employees yet, as it is required by the IRS to obtain your tax-exempt status. The IRS uses your EIN to track your organization’s financial activities. You’ll also need an EIN later on when you open a business bank account and hire employees.
To obtain an EIN, file Form SS-4 with the IRS.
7. File For Tax-Exempt Status
After you have your directors, incorporated status, bylaws, and EIN, it’s finally time to file for your federal tax-exempt status with the IRS. For nonprofits in most states, you only need to do this at the federal level, but some states require you to file for tax-exempt status at the state level too. For example, nonprofits in California must also apply for tax exemption with the California Franchise Tax Board after obtaining tax-exempt status from the IRS.
To apply for your federal tax-exempt status under section 501(c)(3) of the Internal Revenue Code, you will need to file Form 1023 with the IRS. If your organization has gross receipts of less than $50K and less than $250K in assets, you can file the 3-page 1023-EZ application (vs. the 26-page standard 1023).
Some information you’ll need to include in your 1023 application:
Your budget, including any balance sheets or other financial information
The names of your directors
Copy of your articles of incorporation
Copy of your bylaws
Dissolution clause (usually included in articles of incorporation or bylaws)
Conflict of interest clause (usually included in articles of incorporation or bylaws)
Statement of exempt purpose (usually included in articles of incorporation or bylaws)
In order to ensure that your application meets all state and federal requirements, it’s a good idea to consult with a lawyer or someone familiar with tax-exempt law. Including attachments, a 501(c)(3) application package can easily exceed 50 pages.
Note that even after your organization receives its letter of determination from the IRS with its tax-exempt status, each year you will have to submit Form 990 in order to maintain your 501(c)(3) status. This document provides financial information about your organization to both the IRS and to the public.
8. Obtain Business Licenses & Permits
Once you have your tax-exempt status, you’re almost ready to start raising funds. But first, you’ll need to make sure you’re in compliance with all business licenses and permits applicable to your state and your organization’s activities. For example, you may need a sales permit or a zoning permit. Check with your local department of consumer affairs to find out what kind of licenses and permits you need to operate as a charitable organization in your particular state. Some cities may require a city business permit as well.
Registering As A Nonprofit: FAQs
How long does it take to register a nonprofit?
The IRS estimates it will take 100 hours to fill out Form 1023. The application process typically takes between 3-6 months, though it could take as long as a year, depending on whether the IRS has follow-up questions and how quickly you provide the answers.
How much does registering a nonprofit cost?
To file for 501(c)(3) status, you will pay either $600 to file Form 1023, or $275 to file Form 1023-EZ.
The costs of incorporating and obtaining the necessary permits to operate as a nonprofit vary from state to state; however, they usually do not exceed $100-$200.
Is the registration process different in each state?
Yes, somewhat. Check with your state to see if you need to complete any extra steps, such as publishing your nonprofit’s articles of incorporation or filing for state-level tax exemption.
Can any organization register as a nonprofit?
No. Your organization must meet the IRS’s definition of a public charity (the most common type of 501(c)(3) organization), private foundation, or private operating foundation. Be sure to read up on the IRS’ exemption requirements for 501(c)(3) organizations before you apply.
Can I register my business as a nonprofit to dodge taxes or get rich?
No. The IRS has strict regulations in place to make sure that businesses cannot use misuse their 501(c)(3) status for personal gain or to avoid paying taxes. All of your organization’s financial information, including salaries and use of income, will be closely and regularly scrutinized to look out for possible fraud and conflicts of interest. For example, if your nonprofit brings in $500K a year, you will not be able to get away with paying yourself a $200K salary.
Should I hire a lawyer to help with the registration process?
Yes, it is a good idea for first-timers to consult with a legal professional at some point to ensure compliance with all state and federal requirements, particularly when filling out the incorporation paperwork and when preparing the 501(c)(3) forms.
Final Thoughts
Whether they benefit schools, the environment, public safety, or another cause, nonprofit organizations do a lot of good in this world. But if a nonprofit is not officially registered, then it can only make a limited impact. When a charitable organization is incorporated as a nonprofit corporation and obtains a 501(c)(3) status from the IRS, the organization does not have to pay income taxes on the money it brings in, and the organization becomes eligible for other funding opportunities, including government grants and charitable crowdfunding platforms. Additionally, donors are more motivated to donate to IRS-registered nonprofits because any contributions they make to these organizations are tax-deductible.
There is some work involved in registering a nonprofit and maintaining nonprofit status, but your charity and your cause will ultimately benefit from your diligence. If you’re not sure your nonprofit qualifies for 501(c)(3) status, the IRS has information you can review on the various types of tax-exempt/nonprofit organizations, including 501(c)(3) and others. If you think maybe a nonprofit structure is not right for your organization after all, I recommend reading our article on the different types of business structures.
The post The Step-By-Step Guide To Registering Your 501(c)(3) Nonprofit Organization appeared first on Merchant Maverick.
A business cooperative, also called a “worker cooperative” or just a “co-op,” is a type of business that offers some special advantages—namely, the advantages of group ownership. Though it has some commonalities with other business types, including business partnerships and traditional corporations, a business co-op is its own animal with its own unique legal structure. A cooperative is not the most conventional business type and can only work for certain types of businesses. Read on to learn more about whether this unique business model could work for your new or existing business.
What Is A Business Cooperative & How Does It Work?
Essentially, a business cooperative is an employee-owned business. Every member of the cooperative has an equal voice, regardless of how many shares they own. Profits and earnings are divided equally among the members (also called “member-owners”). However, it’s important to know that there are different types of co-ops with different goals, and that there are other business types that resemble co-ops.
How Business Co-ops Differ From Consumer Co-ops
A business cooperative is not to be confused with a consumer cooperative, though the legal structure may be the same. With a consumer co-op, members of the co-op are also consumers of the co-ops good or services, paying into the co-op or sometimes volunteering their labor (usually part-time) in exchange for membership.
Why join a consumer co-op? Membership typically gets you a free service or lower prices for a service. For example, a food co-op typically offers high-quality food at much lower prices than you’d pay at, say, Whole Foods. A parent joins a preschool co-op so that their children can attend the school for free or at a discounted rate. Consumer co-ops typically not-for-profit, community-based services. They may or may not be incorporated as businesses.
Business cooperatives, on the other hand, serve workers. The member-owners of a business cooperative are typically full-time corporate employees.
While business co-ops are democratic by nature and often have a socially conscious business ethos, the main goal of a business co-op is not to provide a community service, but to make a profit. Typically a percentage of profits are distributed equally among owners, while the rest is reinvested in the company. There are co-op businesses in retail, agriculture, healthcare, manufacturing, and other industries. Business cooperatives are incorporated and do business as cooperative corporations.
Business Cooperatives VS Other Business Structures
A cooperative corporation is also not to be confused with a regular corporation (C corp). Though many corporations are partly owned by shareholders who also work for the company, a cooperative, by contrast, is 100% owned by its employees, with no owner having any more control or ownership of the company than any other owner. Unlike a traditional corporation, a cooperative corporation has no executives who hold the majority of shares (among other differences).
Co-ops are also different from business partnerships, which have different liability structures and tax structures, and can involve unequal ownership arrangements. Learn more about the different types of business structures if you’re not sure which one is right for your company. Depending on your goals, a more appropriate business structure might be a partnership or even a limited liability company (LLC), which has a lot of the same benefits of a co-op but with fewer restrictions.
Other business types may borrow some features of co-ops without being true co-ops. For example, Costco and Sam’s Club resemble co-ops in that members pay a fee in order to shop there; however, these businesses are not true co-ops because they are not member-owned.
Business Cooperatives On A Large Scale
Very large business co-ops can operate much like franchises—in that members pay to use the company name and resources, but each individual business location is more or less independently managed. ACE Hardware, whose shares are all owned by individual ACE Hardware store owners, is an example of a retail cooperative. In exchange for purchasing shares of company stock, approved ACE outlets become part owners of the company and can use the ACE name, products, and distribution channels.
A business cooperative can also function sort of like a union, in that its democratically-elected leaders can exert collective bargaining power in their industry if the co-op is large enough. Land O’Lakes Inc., owned by dairy farmers, is an example of a large-scale agricultural business cooperative. Due to its large size and purchasing power, Land O’Lakes has a lot of negotiating power from its suppliers (of trucks, farming equipment, etc.), which it uses to lower its cost of production.
But not all business cooperatives are nationwide brands; most are actually small businesses. A new co-op might only have a handful of employees. There are still benefits to forming business cooperative, even on a very small scale.
The Advantages Of Owning A Business Cooperative
Incorporating your business as a co-op can provide great benefits and establish your organization as a really special entity where workers love their job — with low operating costs to boot. Read on to learn about the benefits of owning a business cooperative.
Invested Employees
Because employees are directly impacted by the company’s performance and share in the company’s successes and losses, they are more invested in the company they work for. Employees are more likely to pour their hearts and souls into a company when they are also owners. Having an equal voice in the company, as co-op owners do, can also inspire more motivated workers. In addition to their labor, employees invest their money into the company, which helps fund the business.
Funding Opportunities
Cooperatives may be eligible to receive certain business grants from the federal government and other entities.
Reduced Liability
Equal distribution of ownership in a cooperative also means equal distribution of liability. In contrast to partnerships where all partners are fully liable for both their own and their partners’ actions, each owner of a cooperative has only limited liability for company debts, obligations, etc. The liability of the co-op’s members is limited only to the extent of their investment in the co-op, provided that they were not engaged in illegal or negligent activities. (LLCs, which can also have multiple owners, also have limited-liability benefits.)
Lower Overhead
Owner-employees are more motivated to keep costs down, because lower costs ultimately increase the company’s profitability. By leveraging their large size, co-ops may also be able to obtain lower-cost goods and services from suppliers, resulting in an overall lower cost of production.
Tax Advantages
Earnings are taxed twice in a traditional corporation—the corporation pays tax on their net earnings and then the shareholders pay taxes on their individual dividends. The federal tax structure of a cooperative—subchapter T of the U.S. tax code—is such that these entities are not taxed on the surplus earnings/dividends they redistribute to members. Co-op owners are only taxed once on their personal co-op income, and not at the co-op level. Thus, a cooperative has a reduced tax burden compared to regular corporations.
The Disadvantages Of Owning A Business Cooperative
A cooperative business model is also not without its downsides. Before you decide to incorporate as a cooperative, make sure you are okay with the following caveats of forming a co-op:
Legal Restrictions
Depending on where you live and work, you may not be allowed to incorporate your business as a co-op. Every state has a co-op law, but they are all different. Some states have very restrictive co-op laws, only allowing co-ops in certain industries, such as agriculture, to incorporate. Other states allow co-op businesses in almost any industry. If your state allows you to form a co-op business, you will still have to adhere to your state’s co-op laws. Before you get yourself in some legal challenges, make sure you are following your state’s business cooperative laws.
Not As Profitable For Founders
Because a cooperative’s earnings and profits are distributed equally among all employees, this type of business is not nearly as profitable for the company’s founders. This doesn’t mean that all cooperative employees are paid equal wages, but in a conventional business structure where the owners/founders have the majority of control and ownership in a company, those owners stand to take a much bigger chunk of the profits. Then again, if you’re considering forming a co-op, there is a good chance that personal profit is not your primary goal.
Funding Challenges
Finding startup loans and other types of funding through traditional lenders may be difficult due to a cooperative’s financial and liability structure. Co-ops also struggle to attract large investors, since a large investor will not have any more control in the company than a small investor. During the startup phase and sometimes beyond, co-ops may have to get creative with other funding sources, such as launching a crowdfunding campaign or applying for small business grants.
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Slow Decision-Making
Have you ever tried to make a decision as a large group? It can be pretty challenging! By the time the entire group decides where to eat, you are out of your mind with hunger. The process to make big decisions as a cooperative, where everyone gets an equal vote in all company decisions, can be equally time-consuming and frustrating.
How To Form Your Co-op
The following are the main steps you need to take to form a business co-op. However, the steps to register your business as a co-op vary somewhat from state to state; check with your state’s Secretary of State or State Corporation Commissioner for more information regarding your stateâs specific co-op laws.
1. File Articles of Incorporation
The articles of incorporation is a document that makes your co-op an official business. This document includes your company’s name, location, purpose, financial structure, and the names of your charter members (incorporators/founders). Your incorporators must file the articles of incorporation with your state business entity registration office.
2. Obtain Business Permits & Licenses
You will need to obtain all local, state, and federal permits and licenses before you can operate as a legal business. These requirements will vary based on your industry and location.
3. Create Bylaws
Once your articles of incorporation have been approved by the state, you can write your bylaws. These are all of the rules and procedures for your cooperative and include membership requirements and duties, as well as general operational procedures for your co-op. Your bylaws must comply with state law, so you may need to consult with an attorney at this time if you haven’t already.
4. Hold Charter Meeting
During this meeting, charter members will adopt the bylaws and elect a board of directors (if the board wasn’t already established in the articles of incorporation).
5. Recruit More Members
To make your co-op a success, it needs to grow its membership. These are the employees and co-owners of your company who will supply the capital and labor. The application members use to join the company needs to include names and signatures from the board of directors, as well as a description of the member rights and benefits.
6. File With The IRS
Even though you are exempt from certain taxes as a cooperative, you will still need to file with the IRS (before the end of your fiscal tax year) to validate your organization’s tax-exempt status. In particular, most cooperatives will need to file Form 1120-C to report income, gains, losses, deductions, credits, and to determine your income tax liability. Any cooperative with employees needs need an Employer Identification Number (EIN) to file taxes, so be sure to sign up for one before tax-time if you haven’t already.
7. Obtain Additional Financing
Depending on your financial needs, you may need to obtain additional financing at some point, especially if contributions from co-op members are not sufficient to cover all your initial startup expenses. As mentioned, crowdfunding and startup business grants are a couple of potential ways co-op startups get capital, and certain online lenders might be willing to extend you a startup loan as well.
Note that if you are converting an established company to a co-op, this process will look different. In addition to incorporating as a cooperative, writing bylaws, etc., you will also need to buy out the original owners/founders and then redistribute that money to the co-op.
Final Thoughts
A business cooperative can be the perfect business structure for certain organizations, particularly those with a democratic business ethos. A strong corporate culture and reduced costs are just two of the many benefits that cooperative businesses enjoy. However, co-ops are also limited in certain ways, and are not appropriate for every business type.
Don’t think a co-op is right for you? Take a look at our business structures explainer to learn about other business structures and their pros and cons.
The post Should You Form A Business Cooperative? Consider These 9 Advantages And Disadvantages Before Getting Started appeared first on Merchant Maverick.
If you’re intrigued by the thought of making money by flipping houses, you aren’t alone. Flip through the TV channels (pun intended), and you’ll see home improvements that lead to a five- or six-figure payday. You may have even received an email promising frozen cocktails on the beach while raking in the dough … all because of house flipping.
What these TV shows and emails don’t tell you is that there is a lot of hard work involved in starting a house flipping business. I know, I know. The idea of a burgeoning bank account without having to do much work is appealing, but it isn’t the reality of the industry. That said, don’t be entirely discouraged — you can build a successful business that centers on flipping houses for a profit. You simply have to be prepared to put in the hard work — just as you would with any other business.
In this guide, we’re going to look at how to start your own house flipping business, step-by-step. While this isn’t a get-rich-quick scheme or even a guarantee of profitability, understanding the industry and what it takes to open and operate your business can increase your chances for success. Whether you’re brand new to house flipping and toying with the idea of becoming an entrepreneur, or you’re ready to hit the ground running, this guide is a must-read before you get started.
Why Start A House Flipping Business?
If you’re reading this, you probably already have at least some idea of what a house flipping business does, but let’s briefly review what this type of business entails. A house flipper buys a property at a low cost. This property could be distressed and in need of repairs, a foreclosure, an older home that needs to be updated, or a house that is located in an up-and-coming neighborhood. Once the home is purchased, it is renovated and resold to another buyer at a higher price.
So, why are people jumping into this industry? One reason that many people choose to flip houses is the potential for profits. If a property is purchased and renovated at a price that’s low enough and resold at a much higher price, you have the potential to pocket thousands of dollars per house. For example, let’s say you purchase a house for $120,000. After putting $20,000 into the house to replace floors, cabinets, counter tops, and make other cosmetic repairs, you are able to resell the house for $150,000. You have only invested $140,000 in the house, so you make $10,000 on this flip. Of course, there are circumstances where a flip doesn’t work out exactly as planned (which we’ll cover a little later), but there is the potential for big profits with a house flipping business.
A house flipping business may also be a great opportunity if you’re somehow already familiar with the industry. Maybe you have experience as a real estate agent or contractor, and you’re familiar with how the business works. You might have even flipped a house or two to make extra cash in the past, but now want to make it a full-time career. If you have experience — whether it’s selling properties or fixing them up — you can put these skills to work for your own house flipping business.
Finally, right now may be the perfect time for you to flip houses. We all remember the housing crisis of 2008, but more than 10 years later, the real estate market is hot again. Housing prices are on the rise, and investors are grabbing up properties to flip. According to Realtor.com, mid-sized cities in the South and Midwest with strong economies, growing populations, and an abundance of older properties in need of rehab are prime markets for flipping. If you live in these areas, house flipping may be the right business opportunity for you.
No matter what your reasoning, you must be prepared to work hard to make your business a success. From finding and securing financing to marketing and reselling your properties, you’ll need to be fully involved every step of the way (at least at first) and be prepared to encounter bumps in the road on your path to building a business.
6 Steps To Starting Your Own House Flipping Business
Whether you’ve already set your mind on flipping houses or you’re still on the fence, it’s important to understand what this business requires to be a success. We’ve outlined six steps to starting your own house flipping business to help you determine if this business is right for you. If so, these tips can help you get you on the right track. Let’s jump right in.
#1 Write Your Business Plan
Every business should have a business plan, and a house flipping business is no exception. A business plan is important for a few reasons. The first is that it acts as a road map for your business. It outlines the purpose of your business, evaluates the industry and your competition, projects profitability, and states the goals of your business.
In addition to outlining your goals and how you’ll achieve them, a business plan is also necessary in most cases to obtain funding. Flipping houses requires capital — capital that you obtain from traditional lenders, investors, or other sources. Your business plan shows that you know what you’re doing, you’re familiar with the industry and your competition, and you have a good chance for success, all of which add up to a lower risk investment for lenders.
There are several ways to write a business plan. A traditional business plan spans several pages and is more complex, containing in-depth analyses of your market and competition, financial projections over the next three to five years, your business strategy, and information about the members of your team. However, more businesses are scaling back on these lengthy documents and opting to create a one-page business plan. A one-page business plan is a condensed version of the traditional plan, offering information such as your objectives, a financial summary, and your industry experience. Learn more about whether a one-page business plan is right for your business.
No matter which plan you choose, there should always be a few things you include about your house flipping business, such as basic timelines, projected budgets, your market, and the types of properties you plan to flip.
#2 Set Up Your Business
Once you’ve written your business plan, it’s time to set up your business. At a minimum, this includes choosing your legal structure, registering your business name, setting up a business bank account, and acquiring any required licenses or permits. Taking these steps allows you to legally operate your business, determines how you pay taxes, and gives you credibility with lenders and investors.
The first step is to choose your legal structure. As a quick summary, a legal structure for a business may take the form of one of the following:
Sole Proprietorship:Â A sole proprietorship is the easiest and cheapest to set up. It does not require registration. Sole proprietors are taxed at the personal tax rate and file business earnings or losses on personal tax returns. This structure does not offer liability protections.
Partnerships:Â A partnership is a structure for a business with two or more owners. Partners are taxed at the personal tax rate and file earnings or losses on personal tax returns. Limited partners have liability protections, whereas general partners do not.
Corporations:Â A corporation is the most expensive to form and has the most requirements, such as annual meetings and a board of directors. Depending on the type of corporation, taxes may have to be filed using the corporate tax rate. Corporations can raise money through the sale of stock. There are also liability protections in place for owners.
Limited Liability Company (LLC): An LLC offers features of several legal structures. There are no requirements, and owners can choose how they are taxed. There are liability protections under an LLC.
This is just a brief summary of each type of legal structure. To learn more and to help determine which is right for you, check out our in-depth guide on choosing your business structure.
Once you’ve determined your legal structure, you’ll need to register your business name with the state in which you’ll operate. Depending on the legal structure you select, additional fees and or paperwork may be required.
Next, you’ll need to find out the types of licenses you need to operate your business. If you’re operating in an office outside of your home, for example, you’ll need a general business license and business insurance. As a house flipper, you’ll also need permits and insurance on each house that you flip, so it’s best to establish a relationship with an insurance agency early in the game. Some house flippers opt to get their real estate license. While this isn’t a requirement for flipping houses, it can certainly help you along the way.
Finally, you’ll need to set up your business bank account. This is necessary for keeping your business and personal finances separate, which especially comes in handy when tax time rolls around. If you seek business funding, this account will also be where your funds are deposited.
#3 Know How To Find & Secure Funding
You’ve taken all the steps of setting up your business and your new bank account. Unfortunately, your new business bank account is probably looking pretty empty … and in most cases, there certainly isn’t enough cash to buy and flip a property. The good news, though, is that this isn’t uncommon for new house flippers — or new business owners in general. It’s rare to find someone with their own cash to start and fund their own business, so that’s why new business owners turn to lenders or investors to get capital they need to start and operate their businesses.
There are a few funding options for flipping houses. The type you select is based on a number of factors, including time in business and your credit history. Not all funding will be right for your business. For example, if you have a low credit score, hard money loans may be an option for you. Hard money lenders base lending on the deal itself — not your personal or business credit or lack thereof — but are usually very short-term and have high fees.
Once you’ve been in business for at least a few months, you may need a flexible funding option to purchase properties, pay for renovations, or cover operating costs. In this situation, you may qualify for a business line of credit. Even if you have a low personal credit score, you may still qualify with lenders that consider the performance of your business over credit history.
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If you own your own home, you could use a home equity loan or home equity line of credit (HELOC) to fund your flips. If you have equity in your home, a low debt-to-income ratio, and a good personal credit score, you could qualify for one of those options, which come with low rates and favorable terms. If you have a retirement account, you could also consider a Rollovers as Business Startups plan (ROBS), which allows you to leverage your retirement funds without penalties.
For unexpected expenses or operational costs, consider applying for a business credit card. You can also get creative by bringing on a business partner or launching a crowdfunding campaign. Whether you’re new to the game, have some experience, or have credit challenges, there are options available to you. You just have to connect with lenders to find them.
No matter what type of funding you seek for your business, there are a few things to keep in mind. First, understand that borrowers with the highest credit scores typically qualify for more options that are also more affordable. So, one of the first things you want to do prior to submitting your application is pull your free credit score, access your credit report, and dispute any errors. You can also take steps to boost your credit score.
Once you apply for funding, make sure that you fully understand the terms, fees, and interest rates associated with your financial product. Don’t be afraid to shop around your options if you aren’t happy with a lender’s offer.
If you do secure funding, make sure to always pay as agreed and meet all conditions put in place by the lender. By doing so, you can not only raise your credit score, but you can also establish lasting relationships with lenders and investors that will serve you well as you build your business.
Unsure of which funding option to choose? Learn more about the best loan products for your house flipping business.
#4 Connect With Contractors & Other Professionals
In addition to lenders, you’ll also need to establish relationships with contractors and other professionals that will help contribute to the success of your business. Even if you plan to get hands-on with the renovation of your properties, you’ll still need a team of contractors to help with the work, particularly when distressed properties are involved. Not only will a contractor complete the work required to flip a house for profit, but a good contractor will know about licenses, permits, and other local requirements. You can also discuss your timelines and budgets with your contractors so you don’t have extended timelines or unnecessary expenses cutting into your profits.
When seeking contractors, don’t be afraid to ask for references or a portfolio. Also, don’t forget to shop around your options to find a reputable contractor that works with your budget. If you’re new to the industry, developing a working relationship with a reputable contractor can even help you score hard money loans from investors.
Another professional that you need on your team is a real estate agent. If you opt not to get your real estate license, a realtor has access to resources that will be essential for your business. This includes access to properties on the multiple listing service (MLS), as well as prospective homeowners that could be interested in purchasing your properties. A realtor can also help market and sell your renovated properties.
Someone else to keep on your speed dial is an attorney, and not just any attorney — one that specializes in real estate. There are some legalities of flipping houses that you don’t want to overlook, so it’s wise to have a real estate attorney on your team. An attorney is especially critical during your first flip. Overlooking important legal details, errors in contracts, and other issues could not only derail your deal but could also damage your reputation in the industry.
Over time, there may be additional professionals you’d like to have in your corner, such as an accountant and investors. For now, though, focus on finding the right contractors, attorneys, and realtors for your house flipping team.
#5 Understand The Importance Of Market Research
Knowing your market is key to maximizing profits as a house flipper. Buying the wrong property in the wrong neighborhood could result in a low profit that’s not worth the time invested in the property, or worse, a loss.
Working with a realtor can really help when it comes to knowing your market. Realtors have the inside scoop on the hottest neighborhoods, information on recently sold properties, and other data that can help you find the right homes for flipping. You can also take advantage of the vast amount of information you can find on the internet, where you can do a lot of your market research for free.
With market research, you’ll soon learn where buyers are buying, how much they’re paying, and what they’re looking for. While there are some variances depending on where you live, there are a few markets that are always hot, including neighborhoods with great schools, neighborhoods with homes that are at least 20 years old, areas with low crime rates, and houses that are close to amenities. Once you understand the market, you can begin further narrowing down the areas you wish to target and begin preparing for the next step: buying and flipping a property!
#6 Buy, Renovate, & Sell Your First Property
You’ve set up your business. You’ve connected with a team of reputable professionals. You’ve found and secured funding, or are at least aware of a few potential options. You know your market, you’ve researched recent selling prices, and there are properties on your radar. Now, it’s time to pick a property, buy it for the right price, renovate it, and then flip it for a profit.
This is where your team will really come in handy. For instance, your realtor may have information on properties before they hit the market, giving you an early edge over other flippers and buyers. Your attorney can help with the paperwork and walk you through the steps of purchasing and flipping a house — think, walk-throughs, insurance requirements, and negotiating contracts.
Once you’ve purchased the property, it’s time to start your renovations. Work through your budget and timeline with your contractors, and put the research you did earlier to good use. Look at comparable properties when determining what renovations need to be completed. For example, if recently sold houses in the same neighborhood have updated granite counter tops, add granite counter tops to your “to-do” list. Finally, be prepared for the unexpected. Deadlines may be missed, or there may be additional expenses that weren’t accounted for in the budget. It happens to even the most experienced flippers — the key is learning to roll with the punches.
After the renovations are complete, it’s time to put your house on the market. Your realtor will be a valuable asset by listing the property and helping you market it to buyers. Then, once a buyer is interested, work with your attorney to make sure all of the i’s are dotted and t’s are crossed. Once the property is sold, any amount that exceeds what you’ve put into the house is pure profit.
Final Thoughts
Let’s make one thing clear: flipping houses isn’t easy, no matter how simple it looks on TV. But if you’re ready to put in the work, you’ll find that house flipping is extremely rewarding. As you flip your first few houses and begin to find your groove, you’ll find that the process gets easier, just as it does with any other business.
You don’t have to go at it completely alone, though. We have a load of great small business resources right here, so check them out and get ready to build your business. Good luck!
The post Your Step-By-Step Guide To Starting A Successful House Flipping Business appeared first on Merchant Maverick.
Nonprofit organizations have never had as many tools at their disposal for raising money as they do today. With all the options out there, you might not think of PayPal as a natural fit for your nonprofit organization, given PayPal’s close association with eCommerce and business enterprises such as eBay. Alternatively, while you might be aware that PayPal offers a Donate button, you may not know about the other PayPal features, policies, and third-party integrations that can facilitate nonprofit fundraising.
With this article, we’ve set out to highlight all aspects of PayPal that can benefit your nonprofit organization — and as it turns out, this encompasses quite a bit! We’ll also detail the main alternatives to using PayPal for nonprofit fundraising.
Why Use PayPal For Nonprofits?
PayPal presents nonprofit organizations with plenty of reasons to use its services to raise money.
Setting up a donation button to accept online payments is a swift and easy process.
Accepting donations online — whether one-time or recurring — is incredibly easy once you have your Donate button set up.
Nonprofits can get a discounted payment processing fee applied to their online PayPal donations.
Want to accept donations offline or in-person? Maybe even sell nonprofit-related merchandise in-person? PayPal facilitates this as well.
Sell branded products online on your website using a customizable cart.
Integrate with countless third-party apps to facilitate charity events, such as auctions, fundraising galas, annual retreats, trivia tournaments — the options are endless!
Disadvantages To Using PayPal For Nonprofits
Of course, PayPal is an imperfect processor — both for nonprofits and everyone else.
Keep in mind that PayPal is a third-party processor (also known as a Payment Service Provider (PSP) or an aggregator). As such, PayPal carries with it an inherent risk of account instability. As opposed to a traditional merchant account wherein each organization or merchant has a separate account, third-party processors combine all their merchants and nonprofits as sub-users under a single umbrella merchant account.
This arrangement means that the sign-up and approval process is nearly instantaneous. It also means that because merchants (and nonprofits) are not vetted before signing up, every transaction gets scrutinized much more heavily than transactions processed by a traditional merchant account provider. This process increases the risk that a completely innocent transaction might trigger an account hold.
You’ll want to review PayPalâs prohibited products and services to make sure youâre in the clear. (Most nonprofits should be perfectly fine, but we make no guarantees, and it’s always important to understand what you are signing up for.) You should also check out our article, How to Avoid Merchant Account Holds, Freezes, and Terminations, to learn how you can minimize the chance of this kind of disruption.
Additionally, some of the PayPal tools you may want to make use of in the course of fundraising are either inadequate or don’t exist. Luckily, there are legions of third-party integrations that can fill in any gaps left by PayPal’s fundraising tools.
PayPal Fees For Nonprofits
One nice perk of using PayPal to accept online donations as a nonprofit is that you can pay a discounted payment processing fee when accepting online payments.
PayPal’s standard processing fee is 2.9% + $0.30 per transaction. However, registered 501(c)(3) charities are eligible to pay just 2.2% + $0.30 per transaction. To do this, you’ll need to do the following:
Verify your 501(c)(3) status by entering your EIN or providing official documentation
Provide a copy of a bank statement or a voided check for each bank account linked to your PayPal account
If your nonprofit organization does not yet have 501(c)(3) status, you’ll have to pay the standard per-transaction processing fee.
Note that nonprofits do not pay a special discounted rate when accepting in-person donations via the PayPal Here mPOS app, which charges a 2.7% fee for all swiped transactions. More on PayPal Here later.
What’s more, if your organization typically processes payments of less than $10, you may want to sign up for PayPal’s micropayments plan. Under this plan, you will pay 5% + $0.05 per online transaction instead of PayPal’s regular processing rate, which saves you money on each transaction if you primarily process low-value transactions from donors.
Make The Most Out Of Your PayPal Account With These Nonprofit-Friendly Features
Let’s go through all the ways PayPal can be a boon to your nonprofit fundraising.
Accept Donations Online
Adding a Donate button to your organization’s website and/or fundraising emails is quick and easy. To get the process started, here’s what you do:
Sign up for a PayPal business account
Select Nonprofit Organization as your business type
Select Nonprofit as the category
Enter your organizationâs bank account information to link it to your PayPal account and transfer funds to your bank account
Note that 501(c)(3) organizations still have to follow the process outlined in the previous section to receive donations at the discounted rate.
To set up your Donate button, you’ll need to follow the steps outlined here on PayPal’s developer page. You’ll be able to do the following:
Choose your button style
Display your organization’s name and logo
Select the currency in which you receive donations
Choose whether donors can give any amount, an exact amount, or provide three set amounts
Choose whether to let donors make recurring monthly donations
Choose whether to collect donor mailing addresses
Choose whether to let donors send you optional notes with their donations
Add additional HTML button variables
Another way to solicit online donations is to use PayPal.Me — PayPal’s peer-to-peer payment platform — to send personalized donation links to your donors. It’s a great way to approach your biggest supporters to ask for individual gifts.
One other thing: If you process more than $100,000 in monthly volume, you’ll need to call PayPal to make special arrangements.
Accept Donations In-Person
Nonprofit organizations can accept in-person payments via the PayPal Here mobile POS system. PayPal Here is not as fully-featured as a full POS, but for a mobile system, it certainly gets the job done.
With PayPal Here, you get your choice of three different mobile card readers, two of which are free until June 30th, 2020. With a mobile card reader, you can process in-person donations at big fundraising events, charity galas, trivia tournaments, or wherever else your organization’s fundraising takes you. Do note that the basic mobile headphone-jack card reader is only suitable for organizations processing less than $500 a month.
All swiped transactions processed by PayPal Here are subject to a flat 2.7% fee. Unfortunately, nonprofits cannot pay a discounted processing fee when using PayPal Here. Keyed-in transactions will be subject to a higher 3.5% + $0.15 fee.
Additionally, you can send out invoices via the app. Invoices are free to send, but when you get paid, you’ll be paying the standard 2.9% + $0.30 rate that PayPal charges for standard online transactions. What’s nice about the ability to send invoices is the fact that for substantial purchases — we’re talking four figures or more — you can just send an invoice, thereby creating a paper trail. That can come in handy later!
Additionally, payments from non-US credit cards are subject to an additional 1.5% transaction fee.
Other PayPal Here features include:
Cash and check recording (yes, you can accept cash and checks with PayPal Here)
Quick sale mode
Item library
Item add-ons
Item categories
Custom tax
Custom tip options
Discounts
Refunds and partial refunds
Recurring billing
Reporting
Sub-user accounts
Support for register setup
Same-day funding
Sell Merchandise
Whether your nonprofit organization is conducting a charity auction (if this is the case, here are some auction apps that integrate with PayPal) or is selling branded merchandise at a gift shop or other “meet space” location, PayPal Here is a solid option for processing your transactions. And if you need a POS system with more feature depth than that provided by PayPal Here, don’t worry, as PayPal integrates with more robust POS systems as well, including:
Vend
Lavu
Touchpoint
talech
Brightpearl
TouchBistro
Revel
The 2.7% PayPal rate for swiped transactions will apply regardless of your POS partner, but you will incur additional software fees for the POS system itself.
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I’ll note that PayPal also offers a Virtual Terminal that you can use to process in-person payments (or accept donations over the phone). However, you’ll need a PayPal Payments Pro account to use it, and Payments Pro costs $30/month. Because other platforms offer a virtual terminal for no monthly fee whatsoever, we don’t recommend this as an in-person donation acceptance method. Also, the Virtual Terminal’s 3.1% + $0.30 per-transaction processing fee is higher than PayPal’s standard in-person transaction fee.
Sell Event Tickets
Perhaps your nonprofit holds events, such as annual retreats or charity galas, from time to time. Or maybe you’ve thought about holding a walkathon to motivate donors to give. If so, you’re in luck, as PayPal integrates with Eventbrite for ticket sales. With PayPal’s Eventbrite integration, not only will you be paying a lower processing rate than with a standard Eventbrite subscription, but you can also choose to pass Eventbrite’s fees on to the customer and avoid paying them yourself. Alternatively, you can absorb the fees to keep your donors happy. Your choice!
Eventbrite offers three different subscription packages tailored for event organizers. All three packages include access to the Organizer app for both iOS and Android devices that, when paired with the rental equipment on offer, can transform your mobile device into a box office.
Track Your Income & Improve Your Bookkeeping
PayPal’s reporting tools give you detailed information about the activity associated with your PayPal account and can assist your nonprofit with bookkeeping. Available reports include monthly and annual financial summaries, monthly sales reports, your chargeback/dispute history, transaction history, order fulfillment reports, money management reports, customer agreement details, Payflow gateway reports, and more.
Additionally, if your nonprofit organization processes $20,000 in gross payment volume from sales of goods or services in a single year and processes 200 payments for goods or services in the same year, PayPal will send Form 1099-K to both you and the IRS for that year early in the following year. Your 1099-K will be accessible from your PayPal account as of January 31st of the following year, and it will tally your payment transactions from the preceding year. You can see further details about PayPal’s tax reporting here on its tax information page, including FAQs and a downloadable guide.
Furthermore, PayPal integrates with QuickBooks via the Connect to PayPal data integration app, available from your QuickBooks account. With this app, you can transfer up to 18 months of PayPal transactions into QuickBooks. You can also import your discounts, taxes, customer data, transfers, and PayPal expenses. View detailed sales information, including your PayPal fees, in your sales transactions. The Connect to PayPal app is free for all QuickBooks users.
Check out this article to see how the services QuickBooks provides can benefit a nonprofit organization.
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Alternatives To PayPal For Nonprofits
Let’s walk through the primary alternatives to using PayPal for nonprofits. Let’s start with online fundraising software:
Fundly: Fundly is an online crowdfunding site with particular appeal for nonprofits as a PayPal alternative, as your fundraising page is completely customizable. You’ll have easy social sharing integrations at your fingertips, intuitive management tools, and the ability to offer perks to donors, depending on their level of support. However, you’ll have to contend with a 4.9% platform fee on top of the 2.9% + $0.30 fee charged to each transaction.
Qgiv: Qgiv’s online fundraising platform is another PayPal alternative worth your consideration from a nonprofit standpoint. Qgiv’s donation forms are fully customizable (much more so than PayPal’s donation forms) and mobile-responsive. The platform allows for recurring gifts to encourage donors. Qgiv even provides an auction platform and event management capabilities from its app. Qgiv’s pricing and fees both vary depending on the level of service you need.
GoFundMe: Most people think of GoFundMe as a platform for personal fundraisers, but did you know that GoFundMe supports nonprofit fundraising as well? With GoFundMe, you can launch an unlimited number of campaigns, access basic donor data, and set up team fundraising pages, all without paying a monthly fee or a platform fee (just a 2.9% + $0.30 processing fee). Alternatively, you can use GoFundMe’s CrowdRise software to enhance your fundraising capabilities further. CrowdRise’s Essential package offers more extensive donor data, ticketing and registration features, deductible email receipts, and more. While the Essential package does sport a platform fee of 5%, this package also lets you pass the fees — both the platform fee and the payment processing fee — on to the donor. Read our GoFundMe review to learn more about the platform.
When it comes to using third-party processors to process your donations, PayPal isn’t the only game in town. Let’s explore the other big third-party processor offering nonprofit-specific benefits:
Square: Square has a lot to offer nonprofits as a payment processor. While Square doesn’t offer a discounted processing fee for nonprofits, its 2.6% + $0.10 per-transaction rate for swiped, dipped, and tapped payments through the Square point of sale app is extremely competitive and cheaper than PayPal’s in-person processing fees (Square’s online processing fee is 2.9% + $0.30). Capturing donor information is easily done right from the transaction screen of the Square POS app, automatically adding your donors to your Customer Directory. Team members can accept donations on your behalf via the POS app as well. And that’s only the tip of the iceberg when it comes to Square’s nonprofit-friendly tools. Read our Square review to get the full scoop, and check out our Square VS PayPal piece for a direct comparison of the two.
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Now, what if you don’t like the idea of using a third-party processor and would rather use a traditional merchant account? While merchant accounts don’t normally come with as many add-on software options as a third-party processor, their laser-focus on payment processing means that you’re much less likely to experience an account hold or termination than with PayPal (or Square, for that matter).
Dharma Merchant Services: This merchant account provider is quite well-suited to nonprofits, provided your organization takes in more than $10,000 per month. Dharma features transparent interchange-plus pricing, which should see you saving money over a service such as PayPal. And unlike some other merchant account providers, Dharma doesn’t charge account setup fees, annual fees, or early termination fees, nor are there any monthly minimums to worry about. Dharma also provides more comprehensive customer support than you’re likely to get with PayPal. Read our full review of Dharma Merchant Services to see exactly why we like them so much.
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Is PayPal Right For Your Nonprofit?
We can’t guarantee that PayPal is the right payment processing solution for every nonprofit. However, when it comes to accepting online donations, PayPal is the absolute simplest tool out there.
With support for in-person payments, invoicing, reporting, nonprofit-specific discounts, and the fact that PayPal’s massive list of integrations with other platforms means you will almost certainly be able to fill any functionality gaps left by PayPal’s in-house solutions, PayPal is more than capable of powering your nonprofit organization. Alternatively, PayPal makes for a great supplementary payment option if you primarily accept donations via other means.
Check out our article on saving money on payment processing as a nonprofit for more on how to keep your costs down. And if you have experience working with PayPal as part of a nonprofit organization, drop us a comment and let us know about it!
The post PayPal For Nonprofits: How To Easily Accept Donations Online And Other Helpful PayPal Features For Your Organization appeared first on Merchant Maverick.
So, you’ve started a nonprofit. You’re passionate about your cause and have put together an inspiring team, united by your shared mission to make a positive difference in the world. But you need some money to help finance your venture. Unfortunately, in our profit-motivated society, it can be extremely difficult to find a lender or other party who has financial incentive to extend you some capital. Whether you need an infusion of capital to maintain your existing nonprofit, or you want to secure financing to get your fledgling nonprofit off the ground, you may have to turn over a lot of stones before you find an interested lender. However, obtaining financing as a nonprofit is not entirely impossible, as long as you know where to look.
Is a business loan a viable option for a nonprofit organization? Where else can nonprofit businesses get financing? Read on to learn the answers to these questions.
Why Nonprofits Have Trouble Getting Business Loans
Nonprofit organizations are, of course, not about turning a profit. Any money they make—if they bring in any money at all—is meant to be reinvested in the organization. Banks, which are all about profits, have little to no interest in helping nonprofit organizations. Lenders consider nonprofit organizations to be “high-risk borrowers,” because they do not trust that you will make enough money to repay a loan. If they do not receive any additional financial incentive to do so—for example, a government subsidy or a “corporate giving” PR campaign—banks typically will not lend to a nonprofit that is not bringing in significant revenues. Such is capitalism.
7 Ways To Get Financing For Your Organization
Fundraising, donations, and member fees are typically the main sources of funds that drive a nonprofit organization. If you need additional money on top of what your organization is able to bring in through these channels, you’ll face a pretty steep climb. However, while it’s not easy, there are ways to finance your nonprofit, even if you can’t get a loan. Also, a loan is not necessarily out of the question, particularly for a more established nonprofit. The appropriate type of funding for your organization will depend on various factors, which I’ll describe in more detail in the sections below.
1) Community Development Financial Institutions (CDFIs)
Short for “Community Development Financial Institution,” a CDFI is a financial institution with a mission to facilitate community growth by providing financial assistance to businesses and consumers in low-income or disadvantaged areas. CDFIs are typically not-for-profit or nonprofit organizations, but may take the form of traditional banks/credit unions or venture capitalists. Usually, they do not operate on a national scale, so you will need to seek out CDFI opportunities in your local area.
CDFIs may be microlenders offering loans of $50K or less, while some CDFIs also issue larger loans to more established businesses. City First Bank in Washington D.C. is an example of a CDFI that offers loans to nonprofits.
While CDFIs can be a viable source of capital to nonprofit organizations, particularly to those that operate in disadvantaged regions, there are some downsides. CDFIs usually charge higher rates than banks do (though lower than you’d get with short-term or payday loans) and typically require you to submit a lot of documentation. It can also take a long time for the funds to come through.
Learn more about CDFIs by reading our comprehensive CDFI loans article, and search for CDFIs in your region on the CDFI Fund website.
2) Banks & Credit Unions
Though it’s much harder to qualify a loan from a traditional bank, there are some banks that offer loans to nonprofits. Big corporations — banks included — often like to flex their philanthropic muscles via nonprofit grants or loans programs. However, banks may charge higher interest rates on loans to nonprofits due to the higher risk involved, and you will likely have to have an established nonprofit with documentation to show your revenue, expenses, fundraising plans, and other financial information.
Credit unions, being nonprofit themselves, are more likely than traditional banks to offer nonprofit loan or grant programs (or serve as CDFIs). As nonprofits, credit unions do not have to pay taxes and can offer very competitive interest rates. A credit union may also be more likely than a bank to extend a loan to a newer or smaller nonprofit. Credit union loans are typically offered in smaller amounts than bank loans and you may have to have a checking or savings account with that credit union in order to qualify.
It’s important to only apply for funding to banks and credit unions that specifically advertise that they work with nonprofits/have a lending program for nonprofits. These institutions will better understand your needs as a nonprofit, and will be more likely to accept your application.
Learn more about credit union loans for businesses (including nonprofit businesses) and how they differ from bank loans.
3) Crowdfunding Platforms
For startup nonprofit organizations that are less likely to qualify for bank loans, crowdfunding can be a good option. There are various types of crowdfunding, but charitable/donation lending is the one most suited to nonprofit businesses. Depending on the crowdfunding platform you use, you may be able to obtain free capital for your nonprofit, in the form of online donations you do not have to repay. Or, you may qualify for a no-interest crowdfunded loan, and you’ll only have to repay the principal on the loan.
It is extremely important to familiarize yourself with the laws regulating nonprofit fundraising in the state or states in which you will be operating. You may have to register your charitable nonprofit with the state before you begin soliciting donations.
If you’re ready to explore fundraising online, start by looking at these 6 platforms that do crowdfunding for nonprofits.
4) Nonprofit Grants
Business grants are another form of funding that nonprofits may be eligible for. Grant money for nonprofits can come from government sources, business associations, corporations, or other nonprofit organizations. Typically, grant money is intended for very specific purposes, and government grants, in particular, require a rigorous vetting and application process. Additionally, they will want to see what you’ve achieved with your nonprofit thus far. Most non-government grants are for smaller amounts (less than $50K) and may resemble a contest or competition in which you’re competing with other organizations. Make sure you check that the grant you’re interested in is open to nonprofit businesses; some grants only apply to for-profit businesses.
When searching for grants, you can check grants.gov, the centralized source for all U.S. government grants. You should also do a more targeted search for grants in your particular region, as many grants only apply to applicants living in a certain state, city, or municipality. For example, the state of Maryland has a lot of business financing programs including grants, many of which apply only to applicants in certain counties. If you operate in an economically distressed region or serve a disadvantaged demographic, you might also be eligible for special grant opportunities. For example, there are business grants for women, business grants for minorities, and business grants for veterans.
You can learn more about business grants for nonprofit organizations by reading our nonprofit grants article.
5) Nonprofit Loan Funds
Nonprofit loan funds are another viable source of capital for nonprofit organizations to investigate when looking for funding opportunities. These institutions, often nonprofits themselves, offer loans to nonprofits in need of funding, and especially to nonprofits in underserved communities. Typically, nonprofit loan funds charge less interest than do traditional lending institutions; in some scenarios, the loans may be interest-free.
Some nonprofit loan funds include:
Nonprofit Finance Fund
Growth Partners Arizona (formerly the Nonprofit Loan Fund of Tucson and Southern Arizona)
The Loan Fund (New Mexico)
Open Road Ventures
Propel Nonprofits (created from the 2017 merger of Nonprofits Assistance Fund and MAP for Nonprofits)
Nonprofit loan funds differ from nonprofit grants in that you will have to repay whatever you borrow. Nonprofit loan funds may also be CDFIs. As with other loans, nonprofit loan funds typically require an operating history—meaning your nonprofit startup may not be eligible.
6) Online Loans
There are various types of online business loans that your nonprofit may be eligible for. Generally, online loans have higher rates and more relaxed requirements compared to loans from banks or credit unions. More established nonprofits may be eligible for a medium-term online loan with a decent interest rate, while newer organizations may have to settle for short-term, high-interest loans. Despite their higher price tags, one benefit of online loans is their speed and convenience; often, an online loan’s time-to-funding—the amount of time from when you apply to when you receive the funds in your account—is only a few days.
For nonprofit startups without any track record, a personal loan could be an appropriate online loan option. You can apply for this type of loan from a personal lender, and the only thing the lender will typically care about is your personal credit score. Personal loans are usually for $50K or less. As these loans come with high interest rates and a short repayment schedule, you might only turn to this type of loan as a last resort. Still, if you choose a reputable personal lender, you will get a better deal than you would from a payday loan or from a cash advance on your credit card.
Some, but not many, online lenders have special loan programs for nonprofits. Accion is an example of one online lender (also a CDFI) that lends to nonprofits.
Note that online loans may require you to sign a personal guarantee which states that you—not your organization—are personally responsible to repay the loan balance.
7) Corporate Giving Programs
Even if you cannot secure a sizable loan or grant, you can benefit from contributions from corporations and even smaller businesses in your community. Whether motivated by generosity or just good PR, it doesn’t really matter: businesses increasingly want to “give back” to their community, and that includes helping nonprofits. Companies in your city or county may have various programs or policies you can benefit from as a nonprofit:
Sponsorship of fundraising events (dinners, dances, 5Ks, etc.)
Paid-release days (days employees are paid to volunteer for a charity)
Taking advantage of corporate giving programs requires some creativity and hard work, as you will have to work together with local businesses to figure out how they can best serve you, typically in combination with your own fundraising efforts. You will also have to generate awareness in your organization about corporate giving programs in your region and frequently reach out to local businesses. The good thing is that businesses are generally happy to display their generosity to the community, as this benefits their organization as well.
How To Improve Your Chances Of Getting Approved
Once you decide to apply for financing, it’s time to find a potential lender and start putting together your application package. If you take the time to properly prepare for the application process, there is a much higher probability that a lender will decide to take a chance on your nonprofit. Here are a few important tips to keep in mind.
Make Sure You Meet The Borrower Requirements
Nonprofit loans are a very specific type of financing, and if you bark up the wrong tree, you’ll just be wasting everyone’s time. Make sure that your organization meets all the minimum borrower requirements for whichever loan you’re considering before you apply. Or if you’re applying for a personal loan, check your credit score to make sure you meet their minimum accepted score. A lender will not make a special exception for you, no matter how awesome your nonprofit sounds.
Choose The Right Type Of Financing
In addition to meeting the minimum requirements for a loan, you also need to choose a loan that will work best for your needs. For example, maybe a line of credit will better meet your organization’s needs than a term loan. Even if you are pre-approved for a loan offer, you must also consider whether you can reasonably afford the loan repayments and are comfortable with the repayment timeframe. If not, you should apply for a smaller loan or consider applying for grants, ramping up your fundraising efforts, etc.
Have A Strong Business Plan
Just like a for-profit business, a nonprofit business needs to have a solid business plan in place, especially when applying for financing. The lender will want to see a specific plan detailing both how your nonprofit organization meets a need in the community and how you plan to use proceeds from a loan, all supported by thoughtful research and strong financial documentation. They’ll also want to see that your organization can successfully raise funds.
Have Your Documents Ready
Whether you’re applying for a loan or a grant, you will be asked to submit certain documents. It is best to have all of these materials on-hand when you apply so you are ready to supply them when asked. Some items you might need include:
Driver’s license or other government issued ID
Your organization’s fundraising case statement
Proof of 501(c)(3) (nonprofit/tax-exempt) status
Recent tax returns
Recent bank statements
Other financial documents such as income reports and cash flow projections
Proof of collateral
Keeping strong records, particularly of your organization’s financial information, will make you better-prepared to supply documentation that supports your nonprofit’s need and eligibility for financing.
Need more loan application help? While we wrote the following articles mainly with for-profit businesses in mind, the same tips for business loan applications generally apply to nonprofit business loan applicants as well:
How To Get A Small Business Loan: The Step-By-Step Guide
20 Tips To Improve Your Business Loan Application
Final Thoughts
Although the nonprofit’s business model is in some ways very different from that of a for-profit business, nonprofits operate similarly to regular businesses in many respects. Working capital, operational expenses, and expansion of services are valid reasons to seek financing, regardless of an organization’s business model. While your financing options as a nonprofit are somewhat limited, you may actually have an advantage over for-profit businesses when applying with organizations such as CDFIs, microlenders, and nonprofit loan funds, and also when applying for government grants.
Has your nonprofit been successful in obtaining financing? Have a favorite nonprofit lender? Sound off in the comments!
The post Why Nonprofits Canât (Usually) Get Business Loans — And How To Get The Financing Your Organization Needs Anyway appeared first on Merchant Maverick.
We’ve all seen the reality TV shows for flipping houses. Someone buys a fixer-upper, completely transforms the house in no time at all, and then flips it for a hefty profit. The reality of fixing and flipping homes isn’t quite so simple. But don’t be fooled — house flipping can be a lucrative venture, although it can take more time, work, and money than what the home improvement shows disclose.
Whether you’re looking to make a little money on the side or you want to start a full-fledged business to replace your traditional 9-to-5, there’s one thing all house flippers have in common: the need for capital. Most people don’t have the funds to flip a home, but the good news is that you don’t have to have a loaded bank account to get started. There are multiple loan options available to you, whether you’re new to the game or a more experienced real estate investor.
In this post, we’re going to take a look at the best loans for flipping houses. These funds can be used to purchase investment properties and fund renovations so you can resell the home for a profit. You’ll learn how to qualify for these loans, why they’re a great idea for house flipping, and the potential drawbacks before you sign your loan paperwork.
Hard Money Loans
Contrary to what the name suggests, a hard money loan isn’t hard to get at all. In fact, it’s one of the easiest loans to secure for purchasing investment properties. However, that convenience comes at a price — something we’ll go into more detail about in a minute.
A hard money loan is private funding obtained from investors or individuals. Unlike financing with a traditional lender such as a bank, your credit score and income aren’t necessarily a requirement for qualifying. Instead, a hard money loan is secured with an asset. With a house flipping business, the property you’re fixing would serve as your collateral and could be seized if you don’t pay your loan as agreed. Funds from hard money loans can also be received quickly — in just days or weeks compared to months with other funders — which may be necessary if you have to move fast to snap up a great deal.
Hard money loans are a good option — and in some cases, the only option — for borrowers with poor credit scores, low income, or other barriers that would prevent them from qualifying for traditional loans. Because the property and its potential resale value are most important to the lender, hard money loans are best for experienced flippers that have fixed and flipped at least one property. However, if you’re a new business owner, you may still qualify, particularly if you are working with a contractor to improve the property.
While qualifying for a hard money loan is easy, there are, of course, a few drawbacks. The first is that hard money loans are short-term loans. Typical repayment terms are 1 to 5 years. As with other forms of short-term funding, hard money loans also have high interest rates when compared to more traditional types of financing, typically in the double digits. The goal, then, is to purchase the property, renovate, and sell it as quickly as possible.
Home Equity Loans & HELOCS
You can also use your own assets — your personal residence — to fund your fix-and-flip venture. How? With a home equity loan or home equity line of credit (HELOC). If you have equity in your home and meet other requirements, you may qualify. Here’s how it works.
As you pay down the mortgage on your home, you build up equity — in other words, this is the difference between the value of the home and what you owe on your mortgage. Rising property values may also contribute to equity. Let’s look at an example. If your home is appraised at $500,000 and you owe $200,000 on your mortgage, there is $300,000 in equity in your home. This equity can be used to secure a home equity loan or line of credit that can be used for any purpose, including the purchase of an investment property.
A home equity loan, which is also known as a second mortgage, provides you with a lump sum that is repaid over a long period of time. A HELOCÂ allows you to draw from a set line of credit multiple times until you enter the repayment period. A home equity loan is the better choice if you know how much money you need to purchase and fix up your property. A HELOC is the best option if you need more flexibility with your funding.
To qualify for a home equity loan or HELOC, a bank or other lender will look at the amount of equity in your home. The lender then uses a loan-to-value ratio to determine how much you can borrow. In addition to owning a home with equity, qualifying borrowers must have a low debt-to-income ratio and a solid personal credit score. You do not have to have prior house flipping experience to qualify.
Home equity loans and HELOCs have low interest rates and long repayment terms, making it more affordable for borrowers to get the funds they need. The downside, however, is that approval and funding of the loan may take a long time, so it’s not ideal for deals that will move quickly. You also put your personal home at risk if you default on payments.
Business Lines Of Credit
If you like the idea of a flexible line of credit but don’t want to put your home on the line, you could fund your business activities with a business line of credit. With a business line of credit, you’ll be approved for a set credit limit. You will be able to make multiple draws against this line of credit up to this limit. If you have a revolving line of credit, you’ll be able to continuously access funds as you pay down your balance.
If the line of credit is unsecured, you won’t have to put up specific collateral, although the lender may put a UCC blanket lien against your business assets or require you to sign a personal guarantee.
A business line of credit is great for fix and flips because of the flexibility offered. If, for example, a renovation goes over budget, you can access additional funds, provided you haven’t already hit your credit limit.
Lenders use information about your business to determine if you qualify for a line of credit, as well as your credit limit. At a minimum, lenders will evaluate your time in business and revenue for at least the last three months. Other lenders may have annual revenue, personal credit, and business credit requirements. Since you will need to show some business revenue and at least a few months of operations, this isn’t ideal for brand new businesses or businesses that haven’t yet made any money.
There are quite a few reasons why you should consider applying for a business line of credit for your fix and flip business. There are few restrictions on how most lines of credit are used, so you can put funds toward purchasing and renovating a property. Also, there are many lenders that don’t take personal or business credit history into account, so this could be a funding option for anyone with a low personal credit score or a lack of business credit.
Of course, like all other forms of funding, lines of credit have their drawbacks. In order to receive the best rates and terms, there are higher borrower qualifications that you might not meet. Lines of credit with minimal requirements may have high interest rates, shorter repayment terms, and additional fees. You might also find yourself limited by your assigned credit limit and be unable to fully fund your renovation.
Rollovers As Business Startups
If you want an alternative to traditional funding, you may be able to put your 401(k) or another retirement plan to work for you through a rollover as business startup (ROBS). Normally, early withdrawal of your retirement funds means that you’ll have to pay taxes and other penalties. However, a ROBS allows you to bypass these penalties and use your retirement funds for your business.
Here’s how it works. A new C-corporation is set up, along with a new retirement plan. Funds from your existing plan are rolled over into the new plan. Funds are now used to purchase stock in the new C-corp. Then, the proceeds from the sale of stock can be used for any business purpose, including funding your fix and flip business.
One of the biggest benefits of a ROBS plan is that you are not borrowing from a lender, so you don’t have to worry about interest rates, closing costs, and other fees. However, many people opt to have their ROBS plan set up and managed by a ROBS provider, which requires a setup fee and monthly maintenance costs. A ROBS provider can get everything set up legally, while also ensuring you maintain compliance.
With a ROB plan, you don’t have to worry about factors like income, time in business, personal credit history, and a business credit profile. You do, however, have to worry about one major drawback: potentially losing your retirement funds if your fix and flip business fails.
Personal Loans
If you’re just starting your business, you’ll find that qualifying for business loans is challenging — if not impossible — for new businesses. This is because newly launched businesses are unable to meet requirements such as a business credit profile and annual revenues. If you don’t qualify for a business loan, why not use your personal information to qualify for a personal loan for business?
A personal loan is a loan that is taken out in your name, not the name of your business. With a personal loan, your business experience (or lack thereof) isn’t a factor for approval. You’ll use your income and your personal credit profile to qualify. Once approved, you’ll receive a lump sum that can be used for business expenses. There are multiple avenues you can take to receive a personal loan for business, from your bank or credit union to online lenders.
Personal loans can have very favorable rates and terms, resulting in a lower overall cost of borrowing. However, the best rates are reserved for borrowers with low debt-to-income ratios and a solid credit history. If you have personal credit challenges, you may qualify with some alternative lenders. However, you may have higher interest rates and shorter repayment terms, or be required to put up collateral to secure the loan.
Traditional Mortgage
If you’re more experienced in flipping houses, you may qualify for a traditional loan or mortgage from a bank, credit union, or other financial institution. These work just like the mortgage of your primary home: the lender gives you money, you make the purchase, and then you repay the loan over a longer amount of time — typically 15 to 30 years.
The good news with these loans is that interest rates are very low. However, qualifying can be difficult. To qualify for a mortgage, you’ll have to show previous experience in flipping houses, meet credit guidelines, and fulfill other requirements. Not all lenders will offer loans or mortgages for properties that aren’t occupied by the owner. Others won’t lend on homes that are in extreme disrepair. Because of its long repayment terms, going the traditional route is often a good idea if you plan to fix up a property and rent it out (or “buy and hold” as it is known in the industry) instead of immediately selling once renovations are complete.
How To Improve Your Chances Of Being Approved For A Fix & Flip Loan
While there’s never a guarantee that you’ll get approved for a loan for your fix and flip business, there are a few steps you can take to improve your odds. The lending process can also be lengthy, especially if you don’t understand the application process. Know what to expect and be prepared by taking the following steps.
Have A Business Plan
Lenders want to work with low-risk businesses that have a greater chance of success. After all, if a business fails, it is more likely to default on the loan. You want to show your lender that you are serious about your house flipping business and that each property is worth the investment. Your business plan should include information about your business such as your industry experience, your objectives, and a financial summary. Learn more about writing your business plan.
Each time you plan to rehab a property, an analysis of that property should be included in your business plan. We’ll discuss what you should include in this analysis in just a minute. Taking the time to analyze each property also is critical for getting the right amount of money from your lender.
Have A Property In Mind & A Plan Of Action
In order to be able to analyze a property and present this information to a lender in your business plan, you must first have a property in mind. Once you’ve found a property, you need to create a plan of action, from what contractors you’re going to use to how much the property will be worth once it’s rehabbed. This not only gives you a better understanding of the costs and timeline of your renovation, but this plan of action should also be included in your business plan.
What should your plan include? At a minimum, address the following points:
Sale prices of comparable homes
Neighborhood analysis
Financial projections for the renovation
Timeline from acquisition to flipping the property
Information about who will be involved in the rehab, such as business partners and contractors
Appraisal of the property in its current state
Estimated value of the property post-renovations
If you’re new to fixing and flipping homes, it’s wise to work with someone that is familiar with the industry. This could mean taking on an experienced business partner, working with contractors that specialize in renovations, or talking to real estate investors. These individuals can share their expertise, which can help you have a better understanding of the business and create an effective and realistic plan of action.
Understand The Costs Of Flipping The House
When it comes to flipping houses, one area that commonly trips up newbies is estimating the costs associated with acquiring and renovating a home. It is very easy to underestimate the costs of fixing and flipping a home. If this occurs, you risk not borrowing enough money from your lender, which could significantly delay your project.
Experienced flippers know that creating a detailed scope of work is imperative to fully understand the costs associated with flipping a property. You can work with a contractor and an appraiser to get a more accurate picture of costs. Some costs to consider include but are not limited to:
Down payment
Purchase price of the property
Closing costs
Building materials
Appliances
Labor: Electricians, plumbers, landscapers, painters & general contractors
Permits
The cost of your renovation will vary widely based on the amount of work that needs to be done. For example, a home that only needs a few cosmetic fixes (upgraded countertops, paint, or new flooring) may have very few associated costs to get it ready for the next buyer. On the other hand, a home that needs structural work, a new roof or HVAC unit, or an additional room may have significantly higher costs.
In addition to the cost of buying and renovating the property, you have to consider other expenses such as property taxes, property insurance, real estate agent fees, and marketing costs to sell the property.
Even with careful planning, you should always expect the unexpected. Unforeseen issues can arise during the renovation process that can increase your costs and add to your timeline. But the more details you include in your scope of work, the more accurate your calculations will be.
Improve Your Credit
Most people don’t have the perfect credit score, so there’s always room for improvement. Cleaning up your credit and taking steps to boost your score not only increases your chance for approval, but also opens up more funding options and helps you qualify for the best rates and terms.
While there is no overnight fix for raising your credit score, there are some steps you can take that can raise your score by several points or more over a few weeks or months. This includes accessing your free credit score, disputing any errors on your report, paying down (or paying off) debts, and keep your balances low. Always make your minimum payments on time (and pay more, if you can) to lower debt and help increase your score. Learn more about how you can raise your credit score before applying for a loan.
Think outside the box
Sometimes, even the most carefully laid plans fall through. For example, maybe the funding you had in place suddenly fell through and now you’re back to square one. It happens to even the most experienced entrepreneurs. The key is to not let it slow you down and to think outside of the box. If you’re having trouble securing funding through traditional lenders or face high interest rates and less-than-stellar terms, consider other financing options. This could include using a real estate crowdfunding platform, taking on a business partner with capital to invest, or tapping a friend or family member for a loan.
Fix & Flip Business Loan FAQs
What type of expenses will fix and flip loans cover?Â
You can get a loan to cover nearly any expense for your fix and flip business. Funding methods like ROBS and home equity loans have few — if any — restrictions on how they are used. Funds from your loan can typically be used to cover a down payment, pay fees and insurance, purchase the property, and fund rehab costs. However, it’s always important to check with all potential lenders to find out about any restrictions on how funds are used.
What is the best fix and flip loan for a beginner?
If you’re a beginner, there are a few funding options to consider for your first fix-and-flip property. Using your own money through a ROBS is one option that has several benefits, such as no credit check or high interest rates. If you have a good credit score and equity in your property, you might also consider a home equity loan or line of credit. All of these options do not have time in business, business credit score, or annual revenue requirements.
Hard money loans may also be an option, but due to higher interest rate, you should explore other alternatives first. While many hard money lenders require you to have some experience fixing and flipping properties, you may still qualify provided you have a solid business plan and connections with experienced contractors or business partners.
Can I get a fix and flip loan without putting money down?
When you apply for a fix and flip loan, lenders typically look at two numbers: the loan-to-value ratio (LTV) and the after-repair value (ARV). The LTV is the size of the loan compared to the value of the property. Most lenders cap their maximum LTVS at 90%, while others may have higher or lower requirements. For example, if you’re purchasing a property that costs $200,000 and will borrow from a lender with a maximum LTV of 90%, the lender will fund $180,000. You will be required to pay $20,000 as the down payment of the home.
Other lenders calculate how much you can borrow based on the ARV of the property. This is the estimated value of the property after it has been renovated. Using the same example as above, let’s assume that the ARV of the property is $300,000. In this example, let’s say the lender will loan a maximum of 80% of the ARV. This means that you can borrow up to $240,000.
With many loans, you may be required to make a down payment. However, some hard money and private lenders may fully fund your real estate deal with no money down. You may also consider other more advanced methods of flipping properties, such as wholesaling — putting a property under contract and then selling that contract to another buyer. Before you dive into these different loans and methods, consider speaking with an experienced real estate investor and fully researching your options.
Can I get a fix and flip loan without a credit check?
It is possible to get a fix and flip loan without a credit check by working with a hard money lender — an individual or investment group that bases its loan approvals on the value of the property and not your credit score. The good news is that personal credit isn’t a factor for approval, so if you have bad credit or a lack of credit history, you may be approved based on the property you’re interested in renovating. On the flip side, though, hard money loans are notorious for high interest rates. These are short-term loans, which means that you’ll have to purchase, renovate, and sell the property quickly.
You may also qualify for a business line of credit if you have an established business. Some lenders will look at performance metrics such as your time in business and annual revenues to determine if you qualify. As with hard money loans, you may face higher interest rates, additional fees, and shorter repayment terms if you go this route.
If you have a retirement account, you can set up a ROBS to use your own funds for your real estate purchase. The only requirement is to have a qualifying retirement account with a minimum amount of funds — no credit check required.
Final Thoughts
Operating a fix and flip business certainly isn’t like what you see on “reality” TV. The reality is that it takes time, hard work, and capital to flip houses. However, when it’s done right — and you find the right funding for your situation — flipping houses can be a very lucrative and rewarding venture. As with any type of loan, make sure you do your research, understand the challenges ahead of you, and make the best decision based on your business goals. Good luck!
The post The 6 Best Ways To Get A Fix And Flip Loan For Your House Flipping Business appeared first on Merchant Maverick.
While buying a franchise can certainly be a profitable investment opportunity, the cost to actually start up a popular franchise is usually quite steep. You will easily invest $2â$3 million to open a Taco Bell or Wendy’s, with the latter fast food chain also requiring you to have liquid assets of $2 million and a net worth of at least $5 million. These requirements put many popular restaurant franchises out of reach for most aspiring franchise owners. However, just because you have to be a multimillionaire to open a McDonald’s doesn’t mean that there aren’t much lower-cost franchise opportunities. You will have to look outside of fast food for the most part, though there are some fast food and restaurant franchises that you can open for under $100K.
Some types of low-cost franchises you can (usually) buy into without breaking the bank include travel agencies, commercial cleaning companies, sports/fitness instructor franchises, education/tutoring franchises, windshield repair, and others. Of course, just because a franchise is inexpensive doesn’t mean it’s a good idea to buy into it—some franchises are cheap for a reason: they’re not a good value. To help you find a quality, low-cost opportunity, I’ve compiled this list of franchises that not only have a low price tag, but also have the potential for high profits.
All of the top franchises on this list can potentially be purchased for an initial investment of less than $100K, but some you can buy into for as little as $2,500. I’ve divided them into categories to make it easier for you to navigate depending on which type of franchise interests you most.
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Travel Agency Franchises
Starting your own travel agency can be a good idea for organized, self-motivated individuals who love travel and like the idea of helping people score great deals on their own dream getaways. Travel agency franchises are often home-based, meaning there is very low overhead and minimal startup costs.
Awards & distinctions: Entrepreneur Best Home-Based Franchise (2018), USA Today Top 50 Franchises for Minorities (2017), IFA 5-Star Franchise (2018â2019), #101 in Entrepreneur Franchise 500 (2019)
If you’ve ever dreamed of starting your own travel agency, Dream Vacations can allow you to do that for a 4-figure initial investment– and from the comfort of your own home. Dream Vacations has collected a lot of accolades over the years (see Awards & distinctions above) and current franchisees rate it highly on sites like Glassdoor and Indeed.com. DV lets you market your business under Dream Vacations or its sister company CruiseOne, and is currently looking for new franchisees throughout the U.S.
A major benefit of owning a home-based travel agency franchise like Dream Vacations is its low overhead. DV is also a veteran-friendly business in that it gives a 20% discount on the franchise fee to veterans. The company offers in-house financing if you can’t afford the franchise fee, or you could also get a franchise loan from a bank or online lender.
Awards & distinctions: #60 in Entrepreneur Franchise 500 and #1 in Travel Agencies category (2019), American Express Travel Representative Excellence Award (2018), Inc. 5000 List (since 2012)
Cruise Planners, an American Express Travel Representative, is another low-cost, work-from-home travel agent opportunity. Don’t let the name fool you; as a Cruise Planners travel agent, you can book a lot more more than just cruises—you can also connect your customers with great deals on airfare, car rentals tours, hotels, etc. Cruise Planners claims they offer the highest commissions in the industry, and they do not require any travel experience.
When evaluating this franchise, I found their website to be very friendly and informative, though I couldn’t find a figure for the initial investment, apart from the $10,995 franchise fee (with no discounts). However, as with other work-from-home, service-based franchises, I expect a home-based business like Cruise Planners would require few startup expenses apart from the franchise fee (according to the official franchise disclosure document, the total initial investment to open a Cruise Planners franchise can range from $2,295 to $23,367). Cruise Planners offers in-house financing if you can’t afford the franchise fee, as well as a deep discount for veterans, first responders, and travel industry professionals. While Cruise Planners has a larger initial franchise fee than some other home-based travel agency franchises, a big perk you get with Cruise Planners is the American Express network affiliation.
Awards & distinctions: Largest network of travel agencies in North America, highest-ranked travel management company in Business Travel News’ annual survey (2016), Top North American travel companies in Travel Weekly 2016 Power List
Travel Leaders is a quality, yet inexpensive franchise ownership opportunity if you’re an experienced travel agent who is interested in running a storefront travel agency. According to information in their FDD (Franchise Disclosure Document), it requires upwards of 10 employees to run a Travel Leaders agency. To be honest, I couldn’t find that much information online about what it’s like to work for Travel Leaders, but the brand has accumulated a number of industry accolades over the years—to be specific, over the past 131 years the company has been in business (Travel Leaders has been franchising for 35 years). Travel Leaders offers several different tiers of franchise ownership, with no long-term commitment.
Travel Leaders is currently seeking experienced travel agents worldwide.
Commercial Cleaning Franchises
If you are a dedicated hard worker but don’t necessarily have a specific skill-set, starting your own cleaning business can really pay off. Commercial cleaning is a fast-growing industry, and most of the top commercial cleaning franchises are flexible and scaleable, with a low initial investment and part-time options.
4. BuildingStars
Initial investment: $2,245â$53,200
Franchise description: Commercial cleaning for office buildings with part-time option
Awards & distinctions: #199 in Entrepreneur Franchise 500, Inc. 5000 List (2017)
BuildingStars is one of the largest, fastest-growing franchises in the commercial cleaning industry, with a sole focus on solutions for office buildings. Services include nightly cleaning, green cleaning and consulting, and carpet and floor care. According to BuildingStars, this franchise offers the highest average gross revenue of any cleaning franchise. BuildingStars also has the benefit of allowing you to start small, working part-time to start your cleaning business while you keep the income and security of your current job. The franchise offers three levels of franchise ownership: part-time technician, full-time onsite manager, and corporate manager. Depending on your goals, you can start as a part-time technician, then work your way up to onsite manager, and then corporate manager as you build experience managing larger-tenant office buildings.
BuildingStars has mostly positive reviews on sites like Glassdoor and Indeed (average of 3.5/5 stars on both sites). The company is currently looking for new franchisees worldwide, and can offer in-house financing to cover not only the franchise fee, but also equipment and other startup costs.
5. JAN-PRO
Initial investment: $4,170â$54,700
Franchise description: Commercial cleaning franchise with multiple tiers of ownership
Awards & distinctions: #1 Commercial Cleaning Franchise and Top Franchise For Veterans in Entrepreneur Magazine (2019), Top 200 Franchise in Franchise Business Review (2018), Top 50 Franchise for Minorities in USA Today (since 2012)
JAN-PRO is another fast-growing commercial cleaning franchises with multiple tiers of investment, including a home-based option. This company’s network of 10,000+ franchisees focuses on business cleaning, healthcare cleaning, and green cleaning. JAN-PRO franchisees offer cleaning services to businesses such as car dealerships, restaurants, banks, gyms, schools, churches, medical centers, and offices. JAN-PRO’s VetConnectionSM program was the first franchise commercial cleaning program created exclusively for veterans—veterans receive a 15â20% discount on the franchise fee.
JAN-PRO can be a good place to start out with commercial cleaning, as no prior experience is required and they provide you with your own accounts so you don’t have to find customers. You can start a JAN-PRO franchise for less than $5,000, which includes initial cleaning equipment, cleaning accounts, education on JAN-PRO cleaning standards, and ongoing support. The franchisee testimonials I found online say JAN-PRO has flexible hours and good compensation, and like the fact that franchise owners can transfer ownership; however, they report that JAN-PRO can be demanding work until you have well-trained employees.
6. Stratus Building Solutions
Initial investment: $3,450â$64,550
Franchise description: Commercial cleaning franchise with multiple tiers of ownership
Awards & distinctions: #42 in Entrepreneur Franchise 500 (overall) and #2 by Entrepreneur â Top Budget-Friendly (2019), “Franchise Rankings” Winner â Janitorial (2015), Franchise Direct Top 100 Global Franchises Award (2016)
Stratus Building Solutions is a general commercial cleaning franchise that specializes in environmentally friendly cleaning solutions, with branded Green Seal Certified chemicals and equipment. From schools and malls to gyms and warehouses, Stratus’s 1,400+ janitorial franchises have customers in just about every industry. This flexible cleaning franchise boasts 16 different levels of ownership, from home-based to master franchise.
You do not need any prior janitorial experience to open a Stratus franchise. In fact, all you need is $1,000. While the total buy-in for a home-based janitorial franchise starts at $3,450, with the help in-house financing, Stratus says you can buy in with as little as $1,000 down (plus another 10% off the franchise fee if you’re a veteran).
Sports & Fitness Franchises
Fitness and sports coach franchises are another low-cost franchise idea if you are an aspiring fitness instructor who wants to benefit from the recognition of a name-brand sports/fitness franchise. In some cases, you can also use the facilities and gym equipment of a master franchise, while working as an independent instructor.
7. Jazzercise
Initial investment: $2,500â$17,155
Franchise description: Global aerobics class brand with instructor and center owner options
Awards & distinctions: #94 in Entrepreneur Franchise 500, #6 on Franchise Chatter’s 25 Best Gym and Fitness Franchises of 2019
Jazzercise might scream “80s party ideas” to the uninitiated, but the franchise has actually experienced a revival in demand in recent years (I think once people just realized it’s an easier version of Zumba), and in fact, Jazzercise never even went out of style in certain circles. In any case, demand for Jazzercise aerobics classes is going strong in 2019.
Jazzercise offers several different tiers of ownership. If you just want to teach, it costs around $2,500. If you want to own your own Jazzercise center, it can range from $9,000 to $38,000. Every instructor is technically a franchise owner, however (not an employee of Jazzercise). All new instructors are trained and certified by Jazzercise before they start teaching, and the training cost is included in the initial fee.
Generally, Jazzercise franchise owners rate the franchise approvingly on sites like Indeed.com. But as for the cons, they say the job can be physically demanding and the pay isn’t great. However, if you want to get paid to exercise and can get by on a part-time income, Jazzercise could be a good investment of your time and money, especially if you already enjoy Jazzercise-ing.
8. Baby Boot Camp
Initial investment: $6,050â$13,179
Franchise description: Stroller-fitness classes for new moms, taught by “mompreneurs”
Baby Boot Camp offers several different types of fitness classes for moms, including popular outdoor fitness classes designed for new moms to bring their stroller-age kids to. The main idea is for new mothers to get back into shape postpartum, though the franchise also offers fitness and nutrition classes for expectant mothers as well. Baby Boot Camp participants cite the community aspect as the main reason they like these classes; they provide an atmosphere for new moms to make friends with similar-age children in their area. As for the instructors, most of them are franchisees. The very reasonable franchise fee includes everything you need to get started, including your own territory. The company website also lists existing franchise territories for sale, which you might be able to buy at a lower rate. You do not need any fitness instructor experience to own your own Baby Boot Camp franchise.
There aren’t too many franchisee reviews online, but the ones I could find were positive and noted the company is extremely family-friendly and allows you to bring your kids with you to work. There are fewer than 150 Baby Boot Camp franchisees in the country, so this franchise could represent an opportunity to enter a market that hasn’t become oversaturated yet.
9. Soccer Shots
Initial investment: $41,034â$53,950
Franchise description: Youth soccer franchise for children aged 2â8
Awards & distinctions: #245 in Entrepreneur Franchise 500 (2019), Forbes âBest Franchises to Buy” (2019)
Soccer is a sport that many of today’s parents want to get their children involved in, not always because they want their kids to embark on a serious soccer career, but more often to simply teach their kids the fundamentals of sportsmanship and teamwork at a young age. And if your preschooler has experience with soccer, there is a good chance that they participated in Soccer Shots, as it is the most popular soccer franchise in the U.S. aimed at young children. Soccer Shots instructors/franchisees teach children basic soccer skills, via 30â40 min weekly classes that take place at their preschool, elementary school, or local community park.
While this isn’t the cheapest franchise opportunity you’ll find, it is still possible to start a franchise for under $50K, and the pay is better than many other franchises—according to the Soccer Shots website, the brand’s franchise-wide top earner makes $3,093,392 in annual revenue, while the top first-year owner made $248,240. Soccer Shots Franchising LLC offers in-house financing to cover the franchise fee, and veterans receive a 15% discount on the fee.
Soccer Shots owners also report a high level of satisfaction: 93.5% of Soccer Shots franchisees would recommend the franchise, according to the Franchisee Satisfaction Index by Franchise Business Review.
Fast Food Franchises
Fast food franchises are typically big earners and as such, they often carry large initial investment. However, it is sometimes possible to start a fast food franchise for under $100K, particularly if it has a non-traditional setup.
Awards & distinctions: #110 in Entrepreneur’s Franchise 500 (2019), Forbes’ “The 10 Best Food Franchises For Your Buck” (2014), largest Alabama-based franchise
Chester’s Chicken is a low-cost fast food franchise, and is, in fact, one of the most affordable fast food franchises out there. Depending on your setup, you can start your own Chester’s for an initial investment of less than $15K. The franchise fee itself is amazingly low, only $3,500. For the right person and location, becoming a Chester’s franchisee could be the perfect opportunity.
A popular southern fried chicken franchise, Chester’s is unique in that it offers flexible franchise options, including store-in-store options. For example, if you already own a grocery store or convenience store, you can become a Chester’s franchisee to start selling Chester’s Chicken in your existing store. In addition to store-in-store locations, many Chester’s locations are located inside of malls, food courts, airports, college campuses, and truck stops. Chester’s was founded in 1965, but only started franchising in 2004.
Awards & distinctions: Best Franchise Deal by QSR Magazine (2018), Franchise Satisfaction Awards Top 50 Franchises (2019), #88 in Entrepreneur Franchise 500 (2019), Franchise Times Top 200 (2019)
Another Alabama-based fast food chain, Checkers Drive-In Restaurants merged with Rally’s Drive-In in 1999 to form a double drive-thru fast food chain, Checkers & Rally’s. Besides burgers, the chain’s varied offering also includes hot dogs, chicken, fish, and desserts. The initial investment is the highest one on this list, but is still quite low compared with most competing fast food franchises.
Versatile and eye-catching modular buildings, multiple financing options, and high ROI (28.7% according to the FDD) make Checkers & Rally’s a good bet for an aspiring fast-food franchisee on a budget. This franchise is an especially good deal for veterans, as the company will waive the $30,000 franchise fee entirely for those who have served in the military.
12. Baskin Robbins
Initial investment: $93,550â$401,800
Franchise description: Global ice cream brand
Awards & distinctions: Largest ice cream chain in the world, QSR Top 50 (2018), Entrepreneur Franchise 500 (2019), Franchise Times Top 200 (2017)
Becoming a Baskin Robbins franchisee means joining the world’s largest chain of ice cream stores, for potentially under $100K. With over 8,000 locations across 54 countries, Baskin’s offering includes not only its beloved rotating 31-flavors of ice cream, but also its popular ice cream cakes and frozen drinks. Though Baskin has been around since 1945, the brand is still growing and changing with the times to stay ahead of competitors. Baskin has rolled out dairy-free and gluten-free options in recent years, as well as a mobile app that allows customers to order online and collect points. In 2017, Baskin teamed up with DoorDash to offer home deliveries.
Baskin offers franchise financing for the development of new units, as well as a waiver of the franchise fee and reduced royalty rates for vets. Conveniently, Baskin lists opportunities to purchase existing Baskin Robbins locations on its website. In addition to traditional establishments, Baskin is also currently interested in non-traditional locations, such as airports, college campuses, transit terminals, and other places with a captive audience and high foot-traffic.
In case you were wondering, yes, Baskin Robbins’s sister franchise Dunkin’ Donuts is arguably an even hotter commodity right now. However, it’s also a lot pricier, with an initial investment that ranges from $228,621â$1,717,103.
Buying A Franchise: What You Need To Know
Even though it typically requires less leg-work than starting your own business from scratch, buying a franchise is still a large endeavor. There are several important things you need to understand before purchasing a franchise:
Opening a new franchise is different from buying an existing franchise (a franchise re-sale) and there are different steps associated with each type of transaction. You’ll probably need to hire an attorney to help you perform pre-purchase due diligence tasks like reviewing the FDD (Franchise Disclosure Document).
Territory is everything in the franchise business. Before buying into a franchise, you need to know how large your territory is and how many franchisees are nearby to make sure you’re not entering an oversaturated market. You can find territory information in the FDD.
Franchises do not run themselves. Most franchisees must be actively involved in managing their franchise in order for it to succeed. That said, once you are running a successful franchise, the franchise company will often give you the opportunity to start additional locations in your territory.
Pay attention to the estimated initial investment (as disclosed in the FDD), not just the franchise fee. Oftentimes on a franchise’s promotional materials (including the company’s website), only the franchise fee is listed front and center, as if to imply this figure is how much it costs to open a franchise. This is, of course, misleading, as the franchise fee doesn’t include the cost of things like inventory, labor, real estate, equipment, working capital, etc.
Is it a franchise or a pyramid scheme? Lots of multi-level marketing companies may sound like a franchise at the outset, promising to let you “own your own company.” But if the “opportunity” focuses mostly on recruiting other people to the company (rather than selling the actual product/service), then you’d probably be wise to run for the hills.
Find out what other franchisees have to say. Check reviews on Indeed.com, Glassdoor.com, online forums, and anywhere else you can find information on a franchise you’re interested in. This way you’ll know whether the franchise is worth investing your time and money, and you will be prepared for the potential negatives associated with owning that particular franchise.
Read my Step-By-Step Guide To Buying A Franchise for more need-to-knows about how to buy a franchise.
How To Finance Your Franchise Startup Costs
There are various ways to finance a new franchise. Which one you choose depends on the franchise’s policies regarding financing, and the types of financing available to you. Here are a few ways franchisees finance their startup costs.
In-House Franchisor Financing: Many franchises have in-house financing programs that allow you to finance startup costs such as the franchise fee, equipment, inventory, etc. It’s also common for franchises to partner with third-party financing sources to offer financing for their franchisees.
Personal Or Business Loan: If your franchise doesn’t offer financing or you prefer not to use their financing program, you can also obtain a loan on your own (depending on if your franchise allows this). It can be difficult for new businesses to get a business loan from a bank, but you might be able to get a startup business loan or a personal loan online. To find out about some good online loan options for new franchisees, be sure to read my post on the best loans for franchises.
SBA Loan: If your franchise is listed in the SBA Franchise Directory, then you may be eligible for a low-interest SBA franchise loan. Read our guide to SBA franchise financing to learn how to get an SBA loan to finance your franchise startup.
There are also alternative financing options you might consider to fund part or all of your franchise startup costs, such as crowdfunding, ROBS, or even a business credit card.
It’s also important to note that most franchises have specific requirements as to franchisees’ personal net worth and liquid cash. Some franchises will not even let you buy into the franchise if you don’t have deep enough pockets to cover your startup costs yourself (in other words, they don’t allow any kind of financing). Most of the franchises on this list do allow you to finance your franchise startup costs via a loan or other means.
Final Thoughts
Buying a franchise is not cheap. In addition to the franchise fee, you have to pay for inventory, labor, a business space, and other costs. You’ll also need to have enough working capital to run your business and support yourself before your franchise makes a profit. However, there are a lot of low-overhead franchises which you can start without breaking the bank. Particularly, home-based franchises such as travel agencies, commercial cleaning companies, and sports/fitness instructor franchises can be very inexpensive to get started with. There are even low-cost fast food franchises out there if you know where to look. As long as you do your due diligence before buying into a franchise and secure adequate financing, you will be well-positioned for success as a franchisee.
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OnDeck is a hugely prolific online small business lender and offers two types of business loans: short term loans and revolving lines of credit. Despite potential drawbacks, if you need a fast loan or donât qualify elsewhere, its hard to beat OnDeck.
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LoanBuilder is a small business loan service offered by PayPal. LoanBuilder stands out with flexible terms, low borrower requirements & relatively inexpensive loans. Ideal if your business needs a short-term infusion of capital.
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The post The 12 Best Low-Cost Franchises You Can Purchase In 2019 appeared first on Merchant Maverick.
To make money in business, you must first start with money. It’s one of the inescapable contradictions involved in launching your own business. This barrier to entry into the realm of entrepreneurship means that plenty of ideas that might otherwise change the world wither on the vine for lack of funding.
Equity financing — that is, financing in which you sell ownership shares in your business in exchange for startup capital — is a funding route available to businesses that can demonstrate their potential for a high rate of growth.
I’ll have more to say about the types of businesses best suited to this path to funding later. For now, let’s delve into the various types of equity financing available to businesses, how they work, and the kinds of companies that stand to benefit from each arrangement.
Equity Investment From Friends & Family
Soliciting equity investments from friends and family isn’t an option for all would-be entrepreneurs. Given the extreme racial and class stratification of generational wealth in this country, this funding route is not a realistic option for the majority of entrepreneurs looking to build a business. However, I would be remiss if I didn’t mention this potential source of equity investment for entrepreneurs privileged enough to have wealth in their social networks or families.
Friends and family aren’t an ideal source of equity investment because you’ll be jeopardizing close personal relationships in the event your business venture goes down in flames. Nonetheless, this is one of the more common sources of equity financing, so if the option is available to you, it’s something to consider. What’s more, people in your personal networks may be more open than other investors to funding a business without, say, the exponential growth potential of a tech startup.
Of course, while it may be easier to convince your Uncle Earl of the merits of your business plan than it is to convince an angel investor or venture capitalist, you’ll have to be comfortable with the idea of Uncle Earl owning a chunk of your business and having a say in how it operates!
Venture Capital
Venture capitalists are a hard lot to impress. Popular entertainment (Shark Tank comes to mind) has propagated the image of the hard-hearted VC investor shooting down entrepreneurial dreams left and right. Of course, there are exponentially more would-be entrepreneurs than there are venture capitalists, so VC firms can naturally be ultra-selective when choosing their investments.
Given this highly competitive environment, VC firms have the luxury of investing only in early-stage companies with the highest potential for rapid growth. These investment firms also have a low tolerance for placing risky bets, so it’s a very narrow slice of the entrepreneurial world that gets substantial VC attention.
Owners of early-stage tech ventures with the potential for supercharged growth tend to be the business owners who have the most success at attracting VC attention and investment. If this describes you and your business, it may be worth seeking out some of that sweet VC cash. Keep in mind that venture capitalists tend to be more hands-on in influencing how your business is to be run than, say, angel investors. VC firms, when they do invest in a business, tend to invest a lot — consequently, they acquire more equity in your business than do other types of investors. They may well require that a representative of the firm sit on your board of directors.
If you’re building the kind of company that appeals to venture capitalists and you accept the trade-offs involved in any VC equity funding arrangement, by all means, pursue this funding avenue!
Angel Investors
Angel investors are distinct from venture capitalists in several ways. They tend to make smaller investments in businesses than do VC firms, but, accordingly, they typically take a more hands-off approach with the businesses they invest in. Angel investors are often successful entrepreneurs themselves, and they may be more motivated by your personal qualities than your typical VC outfit.
As angel investors often take a more personal approach to what they invest in than do VC firms, they may be open to funding a wider variety of early-stage businesses than a venture capitalist would. Many angel investors come from outside the tech world, and many of them likewise tend to invest in businesses within their sphere of expertise.
This isn’t to say it’s easy to get an angel investor on board with your new business. However, depending on the kind of business you’re building, you may find angel investors to be a more likely source of funding than a VC firm — and with more flexible terms to boot.
Mezzanine Financing
Mezzanine financing combines both debt and equity financing. Here’s how it works:
The lender provides you with a loan. So long as you make your payments on the loan, you’ll retain full control over your business, and the loan will be treated like any other loan. However, if your business takes a downturn and you can’t repay the loan, the lender can then convert the loan into equity interest, effectively seizing a portion of your company and establishing a claim to any future profits generated by your business.
This type of arrangement lessens the risk taken on by the lender and, in turn, makes it more likely they will lend to a business. Of course, any business taking out a mezzanine loan is taking on the risk that the lender will take over a portion of the business if you can’t meet the repayment terms of the loan. If you are able to make the payments, however, you’ll keep full ownership of your business.
Small Business Investment Companies (SBIC)
The US federal government, via the Small Business Administration (SBA), regulates a program called the Small Business Investment Company (SBIC) program. The SBA describes SBICs thusly:
An SBIC is a privately owned company thatâs licensed and regulated by the SBA. SBICs invest in small businesses in the form of debt and equity. The SBA doesnât invest directly into small businesses, but it does provide funding to qualified SBICs with expertise in certain sectors or industries. Those SBICs then use their private funds, along with SBA-guaranteed funding, to invest in small businesses.
The SBA website goes on to state that SBICs “invest in small businesses through debt, equity, or a combination of both.”
Unfortunately for startups, SBICs typically fund mature businesses that have already established their profitability. However, different SBICs have different investment profiles, so it may be worth it to look into any SBICs that are currently investing in your particular field. There are three universal requirements for any business seeking to participate in this program, however.
At least 51% of your employees and assets must be within the US
Your business must qualify as a small business according to SBA size standards
Your business must be in an approved industry (certain industries, such as farming, real estate, and financing, are not on the approved list)
Equity Crowdfunding
Equity crowdfunding is a new form of equity investing. It was legalized in 2012 with the passage of the JOBS act to allow everybody the ability to invest in companies conducting equity crowdfunding campaigns. It’s like backing a Kickstarter project, except instead of sending money to a campaign in exchange for a product or some branded merchandise, you invest in a company in exchange for equity in the company.
Essentially, equity crowdfunding websites put you in touch with a crowd of potential angel investors, only instead of receiving a large investment from one angel investor, you’ll receive lots of much smaller investments (often as low as $20) from armchair investors who liked what they saw in your online crowdfunding campaign (that is, if your campaign is successful).
Thus far, the equity crowdfunding industry hasn’t taken off in the way those who pushed the passage of the JOBS act had imagined. Nonetheless, many companies have managed to attract investments this way, and it presents entrepreneurs with a way to go around the VC companies and the big angel investors to appeal directly to the public for investments. If you think your business project has mass appeal, but you haven’t been able to secure any VC or angel investor capital, consider an equity crowdfunding campaign.
If you’re interested, check out our article on how equity crowdfunding differs from “regular” crowdfunding. If you’re wondering which equity crowdfunding sites might suit your business, have a look at our piece detailing seven leading equity crowdfunding sites for entrepreneurs.
Equity Financing VS Debt Financing: Key Differences
In case there is any confusion, let’s differentiate between equity financing and debt financing.
When you take out a small business loan from your bank, or when you buy a Playstation 4 using your credit card, that’s debt financing. Your creditor (your bank in the first example, your credit card issuer in the second) doesn’t own or control any part of your business (or your PS4). Rather, you simply have to pay back your lender with interest. That’s great if you’re able to pay back what you borrowed — you’ll have no further obligations to your creditor! Of course, this arrangement involves you bearing risk. If you’re unable to make your required payments on your debt, your creditor can go to court, have your assets seized, wages garnished, and just generally make your life hell.
By contrast, equity financing involves less risk to you (and more risk to the investor). If you’re able to secure equity investment in your business and your business ends up crashing and burning, you don’t have to repay your investors. They take the loss on the investment, not you. Of course, the flip side of this is that equity financing will cost you if your business is successful. That’s because your equity investors will be entitled to their portion of your business profits for as long as they own shares of your company, which may well be the entire life-span of your business (unless you buy them out, which will almost certainly cost you more than the amount of the initial investment).
Is Equity Financing Right For Your Business?
Any comparison of debt and equity financing wouldn’t be complete without noting the simple fact that equity financing is harder to obtain than debt financing. The primary sources of equity investment — venture capital firms and angel investors — usually look for early-stage companies with explosive growth potential, often tech companies. If your business venture doesn’t have expansive, global ambitions and is more locally-oriented, you’re much more likely to find success securing debt financing than equity financing.
That’s not to say that a smaller/more local business could never get equity investment. However, you’ll likely have to turn to alternative sources of equity investment, such as equity crowdfunding or friends/family.
Let’s get down to brass tacks. Is equity financing right for you and your business?
Equity financing is right for you if:
Your business has exponential growth potential
You are an entrepreneur looking for a mentor for guidance (angel investors like to mentor)
You want to avoid going into debt to finance your business
You have global ambitions for your company
Debt financing may be better for you if:
Your business does not yet have a plan for rapid growth
You want to retain complete control over your company and all future business profits
Your company only serves the local market
You want to raise capital without concerning yourself with federal securities laws and regulations
Final Thoughts
Equity financing isn’t a funding route for every business venture. However, if you think it’s a route worth pursuing to fund your new business, just know that there are multiple ways to seek equity investment.
If you decide that traditional debt financing is a better bet for your business, have a look at our full set of business loan reviews! It’s filterable!
The post Types Of Equity Financing For Businesses appeared first on Merchant Maverick.
Before you launch your business, you have to check a few items off your to-do list. Perhaps you have to purchase inventory, find a commercial building to lease, and explore different types of business software. Maybe you operate a home-based business so your list isnât as extensive. No matter what type of business you plan to open, though, thereâs one thing all business owners must do: select a business structure.
Thereâs no getting around choosing your business structure. The way your business is set up determines both how youâll file your taxes and how much youâll pay. Your business structure may provide you with personal liability protection against the debts and obligations of the business. It will also determine specific requirements for your business, from registering with your state to ongoing requirements (like holding meetings and recording meeting minutes).
If your business has just one owner, one business structure to consider is the sole proprietorship. But before you make that critical decision, itâs important to understand what a sole proprietorship is, registration and paperwork requirements associated with this structure, and the benefits and drawbacks of being a sole proprietor.
While the business structure you choose should ultimately be whatâs best for your business, we hope to make the decision process a little easier by breaking down exactly what to expect as a sole proprietor. Keep reading to find out more.
Sole Proprietorship Definition
Merriam-Webster defines a sole proprietorship as âa business owned and controlled by one person who is solely liable for its obligations.â
Letâs break down this definition. A sole proprietorship is a business that belongs to and is run by only one person. If your business has multiple owners, youâll be unable to operate as a sole proprietorship.
In a sole proprietorship, the owner alone is liable for the obligations of the business. A sole proprietorship is not a separate legal entity. This means that the owner — you — is responsible for the debts, obligations, and liabilities of the business. Your personal assets may be seized to fulfill debts, and lawsuits can be brought against you personally.
Many people choose this structure because a sole proprietorship is the quickest, easiest, and most inexpensive way to start and operate a new business. A sole proprietor is not required to register with the state. Simply engaging in business activities legally establishes a sole proprietorship. However, the sole proprietor is still required to apply for the appropriate business licenses and permits needed to legally operate in their state.
Sole proprietors can operate under their own legal names or can create a fictitious trade name when doing business. Using a trade name does not establish a separate legal entity, and the business owner will still be held responsible for the liabilities of the business.
Sole proprietors do not have to file separate tax returns for their businesses. Instead, these business owners report business profits, losses, and expenses on a Schedule C form. Self-employment tax for the sole proprietor is reported on a Schedule SE. The Schedule C and Schedule SE are both filed with the business ownerâs Form 1040. Weâll dive deeper into the benefits and drawbacks a little later in this article.
Next, weâll compare sole proprietorships to other business structures so you can better determine which works best for you.
How Is A Sole Proprietorship Different From A Partnership?
The biggest difference between a sole proprietorship and a partnership is the number of owners of the business. A sole proprietorship has a single owner. A partnership has two or more owners.
Comparing a sole proprietorship with a limited partnership (LP) and limited liability partnership (LLP) reveals a few additional differences. With these types of partnerships, limited partners are protected from personal liability. These partnerships are also more expensive and more complicated to form because they require registering with the state.
Other than the number of owners, a sole proprietorship and a general partnership (GP) are very similar. Neither has to be registered with the state to exist. The profits and losses for a sole proprietorship and general partnership are also filed on personal tax returns.
How Is A Sole Proprietorship Different From A Corporation?
A sole proprietorship is very different from a corporation. A corporation is the most expensive business entity to form, whereas a sole proprietorship is very inexpensive. Corporations must be registered with the state. There are also multiple ongoing requirements corporations must meet, such as holding meetings and having a board of directors. Sole proprietors do not have to register and there are no ongoing requirements.
Corporations may have multiple owners, whereas a sole proprietorship has just one owner. Corporations can also raise capital through the sale of stock — something a sole proprietor can not do.
Corporations also offer the best personal liability protection for its owners. As previously discussed, sole proprietors are held personally responsible for the liabilities of the business.
Another big difference between sole proprietorships and corporations is how each business structure is taxed. Sole proprietors are able to report business profits and losses on their personal tax returns. Corporations are taxed differently — a corporation is the only business structure that must pay separate income taxes. If dividends are paid to shareholders, shareholders must report this on their personal tax returns, resulting in double taxation for the corporation.
How Is A Sole Proprietorship Different From An LLC?
A limited liability company, or LLC, combines benefits of different business entities. An LLC must register with the state, and there are some fees associated with starting an LLC. This is in contrast with sole proprietorships, which are not required to register and are the least expensive to start.
Another difference between the two is that LLCs have liability protections in place to protect the personal assets of the owners. Sole proprietors do not receive these same protections. LLCs may also have multiple owners, whereas a sole proprietorship is limited to a single owner.
There may also be differences in how the LLC is taxed. Owners of an LLC can choose how they are taxed. In some cases, they may opt to be taxed as a sole proprietorship. In other cases, however, owners may choose to be taxed as a partnership or corporation.
What Types Of Businesses Are Sole Proprietorships?
A sole proprietorship is best for businesses with one owner that wants full control of the business without complicated requirements or additional expenses. Self-employed business owners, home-based businesses, independent contractors, and even some franchise owners may choose this business structure.
Any business can be a sole proprietorship provided there is just one owner and the owner is aware of the benefits and risks of this business structure. Smaller businesses are better suited for sole proprietorships. Companies that plan to grow much larger and want to take out business loans or raise large amounts of capital in the future would benefit from another business structure, such as a corporation or LLC. Some common small businesses that are sole proprietorships include:
Home Healthcare Businesses
Catering Companies
Housekeeping Services
Virtual Assistants
Freelance Writers, Editors, Or Designers
Tutors
Computer Repair Technicians
Landscapers
Bookkeepers
Regardless of what type of business you operate, the business structure you select should be based on the long-term needs and goals of your business.
Benefits Of Sole Proprietorships
After breaking down the definition of a sole proprietorship, you should have at least some idea of why business owners would choose this structure. However, letâs take a closer look at the full list of benefits of operating your business as a sole proprietor.
Less Expensive: Sole proprietorships are the easiest and least expensive forms of business structures. This is ideal for business owners that aim to keep their startup costs as low as possible.
No Registration Required: Sole proprietors simply need to participate in business activities to exist. No state registration is required. However, any applicable permits and licenses will need to obtained to legally operate in your state.
No Ongoing Requirements:Â Sole proprietors are not required to hold meetings, record meeting minutes, or have a board of directors.
Full Control Of The Business: As a sole proprietor, you will be the sole owner of your business. There are no additional owners or shareholders to consider. You get to make all business decisions and you receive all of the profits.
Easier Tax Returns: Sole proprietors can file their business profits, losses, and expenses on their personal tax returns with just two additional forms.
Drawbacks Of Sole Proprietorships
While being a sole proprietor definitely comes with its benefits, there are also drawbacks to consider when youâre weighing out your decision. Those drawbacks include:
No Liability Protection: As a sole proprietor, you will be held responsible for the debts, obligations, and liabilities of your business. If you default on a loan, lenders can come after your personal assets, such as your bank account, vehicle, or real estate. If your business goes bankrupt, your personal finances could be affected. Finally, lawsuits can be filed against you personally, which would also put your assets at risk.
Financing Challenges: As a sole proprietor, getting business financing can be a challenge. Most lenders — from traditional lenders like banks to online alternative lenders — only provide financing to registered entities. Sole proprietors also canât sell stock in the business as a way to raise capital. As a sole proprietor, you may have to get more creative with your financing, such as launching a crowdfunding campaign or taking out a personal loan for business.
Final Thoughts
For many aspiring business owners, operating a sole proprietorship is the right path to entrepreneurship. However, what works for some doesnât always work for others. After weighing out the pros and cons of a sole proprietorship, consider consulting with an accountant and/or attorney to help determine if a sole proprietorship will meet the needs and goals of your business.
Ready to learn more? Download our free beginner’s guides for business. You can also learn more about the different types of business structures to help you further pinpoint which option is best for you.
The post What Is A Sole Proprietorship? appeared first on Merchant Maverick.
