Every business owner probably dreams of regular, stable, month-to-month cash flow, with spare cash on hand to cover any expenses that might arise. The reality for most businesses, of course, is that sales are often seasonal. One way to bridge the famines between the feasts is to use seasonal financing to normalize your cash flow.
Use A Seasonal Business Loan To Get Financing When Your Business Needs It Most
Technically, there’s no financial product called a “seasonal business loan.” There are, however, a number of ways to finance your business’s short-term, cyclical needs. These include loans, lines of credit, and even business credit cards. What you’ll want to look for is money you can quickly access when you need it and then pay back as soon as you can to get it off your books.
6 Reasons You Might Need A Seasonal Business Loan
Before we get to the types of seasonal business loans you can tap to cover your seasonal shortfalls, let’s take a look at some of the reasons you might need a seasonal business loan.
1) Meeting Payroll
Labor is usually one of the biggest expenses for any business. While some businesses may be able to get away with having seasonal staff, that’s often not the best way to retain talented and reliable personnel. Even if you have seasonal staff, you may need to hire them in advance of your seasonal peak, before you have the revenue to cover salaries. A seasonal business loan can help you hire and retain talent.
2) Off-Season Repairs
Whether through planning or bad luck, sometimes repairs and maintenance need to happen when your company isn’t all that busy. Perhaps a key piece of equipment broke. Maybe you want to redo your storefront. In any case, you may need additional funds to cover the costs.
3) Buying Inventory
If your busy season is looming, and you sell a product rather than a service, you’ll probably need to stock up in advance. If you’re coming off a slower season, you may not have the funds available to cover the inventory you need. You don’t want to miss out on sales because you’re sold out.
Need to stoke the fire in preparation for your busy season? Want to try bringing in more business during the off-season? You may need to do some advertising. While you probably don’t want to go overboard, a well-placed campaign can make a big difference in your sales. If you need money to cover it, you may want to try a seasonal business loan.
5) Planning Ahead
Some types of seasonal funding can serve as an “insurance” policy of sorts. With a line of credit or a business credit card, you can have money at the ready for unanticipated expenses.
6) Normalizing Your Cashflow
Most of your month-to-month expenses probably don’t disappear when your revenue is low. Some businesses may find it useful to use a short-term financial product to keep all their expenses up to date.
Best Types Of Loans For Seasonal Business Needs
So you’ve determined that you need some kind of seasonal business loan. Now let’s look at the types of financial products and services that can help you meet your seasonal expenses.
If you’ve looked at any online lenders, there’s a pretty good chance you’ve seen an advertisement for a short-term loan. These loans are a little bit different than the typical term loan you might get from a bank. They’re designed to be quick, and that applies to everything from the application to the repayment process. Most short-term lenders can drop a healthy lump sum in your account within a few business days if you’re approved. Repayment usually begins immediately, with regular payments deducted automatically from your business account either each business day or weekly. The term length of a short-term loan is generally a year or less.
If you need a relatively large chunk of cash quickly and can handle the repayment schedule, short-term loans are a great way to get your hands on working capital.
Lines Of Credit
A line of credit is like a loan you may or may not use. Or you might only use part of it. If you successfully apply for a line of credit, your lender will extend you a certain amount of credit. This number is your credit limit. For as long as your line of credit is active, you can draw money from it so long as the total amount you’ve borrowed does not exceed your credit limit. In most cases, you’ll only pay interest on the amount of credit you’re using.
Lines of credit are great for seasonal businesses that want a kind of “rainy day fund” for unexpected expenses. Most lines of credit are revolving, meaning that as you pay them off, your credit becomes available to use again. If this sounds similar to a credit card, that’s because credit cards themselves are a form of revolving credit. That said, a non-credit card line of credit will often be better for making larger purchases that you can’t pay off within 20 days.
Business Credit Cards
And speaking of business credit cards, they are also a valuable way to bridge the gap between your boom months. Business credit cards are similar to personal credit cards, except they tend to have bigger reward programs. They also lack some of the legal safeguards associated with personal credit cards, so if you’re going to use them, make sure you don’t get in over your head.
When should you use them? Business credit cards have a narrow application, but within their niche, they can actually save you money. The key is to never carry a balance. By that, we mean you should pay your card off in full during the interest-free credit grace period offered by your issuer. You’ll collect points without accruing any interest! This makes business credit cards ideal for smaller, short-term expenses.
Equipment financing covers an enormous swath of products that includes both loans and leases used to acquire hard assets. While many of these are potentially useful, of particular interest to seasonal businesses may be the operating lease. If you only need a piece of equipment for part of the year, it may make more sense to rent it than to own it. Operating leases can be a great way to get your hands on up-to-date equipment when you need it, without being burdened by long-term upkeep and repair costs.
Where You Can Find Seasonal Business Loans
Ready to look for a seasonal business loan? When you have an idea of what type of product best fits your needs, you can check out one of our best-of guides to help you compare your options.
The Best Small Business Loans: Top Picks For Every Type Of Business
The Best Business Credit Cards
The Best Lines Of Credit For Small Businesses
The post The Best Types Of Loans & Financing For Your Seasonal Business Needs appeared first on Merchant Maverick.
Venture capital: As an entrepreneur, you’ve undoubtedly heard of it, but you may not be familiar with exactly how it works or whether it could be a good option for your business. You may be wondering if your startup is even eligible for venture capital. Keep reading to learn what venture capital is, what sorts of businesses and entrepreneurs are good candidates for VC funding, and how to go about tapping into this resource!
What Is Venture Capital?
Venture capital is a type of equity financing where investors provide capital to a young business with high growth potential in exchange for equity in the business. In addition to ponying up startup funds, VC investors also give direction to the companies they invest in to help them succeed. The venture capitalist’s long-term goal is to make a profit when the company they invest in goes public or is sold to another company.
Venture capital firms are usually looking to invest in tech companies, though some may specialize in healthcare or other industries. Most VC firms specialize in a specific type of industry, focusing on businesses that are in a particular stage of growth. VC firms are often located in or near tech metropolises, such as New York City, San Francisco, Boston, and Austin, and usually (but not always) focus on businesses in their immediate region.
How Venture Capital Works
Most everyone has seen Shark Tank, but in actuality, there’s a bit more to VC than making a quick pitch to a room of hyper-critical rich people. Securing VC funding is a little less intimidating than defending your life’s work to Mark Cuban in under five minutes, but it’s also a long, multistage process. It requires a significant amount of patience, diligence, and flexibility, as you may have to change your company to fit your investor’s vision for growth. You should also keep in mind that VC funding is extremely competitive, and your company must have a lot to offer potential investors â only about 0.05% of startups are able to obtain this coveted form of capital.
Venture capital is not a loan; venture capitalists invest in companies in exchange for equity or ownership in the company, betting that they will make money if your company does well. So what are these entities that supply venture capital? Generally, they are investment firms (rather than individual investors). Venture capital investment firms raise and pool funds from a range of sources, from corporations to nonprofits, pension funds, and wealthy individuals. These investors are limited partners in the venture capital firm.
VC financing is risky for the investor, which often loses money when a company fails. However, they know that not every company they invest in is going to be the next Uber or PayPal. The VC investor can offset their risk by investing in many different businesses, some of which may deliver a phenomenal profit. Most VC firms make a profit of about 20% a year.
How Venture Capital Compares
Venture capital shares similarities to certain other types of startup financing, but there are also some important differences you should know about.
Venture Capital VS Debt Financing
As mentioned, venture capital is a form of equity financing. Equity financing differs from debt financing in several ways. Namely, debt financing is structured as a loan, which you have to pay back with interest. However, the debtor is just a debtor; they don’t own any part of your company or have any say in your business decisions. Some examples of debt financing include lines of credit, business credit cards, and SBA loans.
Venture capital is not a loan, so the recipient does not have to pay it back or pay any interest or fees. VC also includes more than just capital â you also get business guidance and mentorship. But in exchange for the help getting your business off the ground, you have to forfeit some control over your company to the venture capital firm. Also, unlike debt financing, which serves a wide variety of business types, only certain kinds of businesses â technology and innovation businesses with high growth potential â are good candidates for venture capital.
ReadÂ Pros & Cons Of Debt VS Equity Financing to learn more about the differences between debt financing and equity financing (such as venture capital).
Venture Capital VS Private Equity
Venture capital and private equity are both types of equity financing and are similar in several respects. PE investment firms and VC investment firms both provide capital to privately-owned companies, using pooled funds from investors that are limited partners of the firm. The main difference is that VCs invest in startup companies in exchange for a minority stake in the company (less than 50%). In contrast, PEs invest in mature companiesÂ for a majority stake (more than 50%).
Also, while VC-backed companies tend to be innovative and tech-focused, PEs tend to invest in traditional industries, such as retail, restaurants, and manufacturing. The types of mature companies PEs invest in need capital to expand, address inefficiencies, or fix stagnation related to lack of capital.
Venture Capital VS Angel Investors
Angel investors also have a lot of things in common with venture capitalists. Angel investors invest in privately-held companies in exchange for equity, but these investors tend to be high net-worth individuals or groups of individuals (rather than investment firms). Most angel investors are entirely profit-motivated, but some angel investors are at least partially motivated by philanthropy. For example, there are angle investment groups dedicated to helping fund underserved business owner demographics, such as women-owned businesses or veteran-owned businesses.
Angel investors typically offer smaller investments and have a more hands-off approach to supporting your company. They also tend to serve a wider variety of industries than VC companies and offer more flexible terms.
When Venture Capital Is The Right Choice For Your Business
The following are attributes of business owners who are well-suited for venture capital investment:
Your business is related to technology or innovation (some examples include web-based tech, sustainable energy, fintech, healthcare technologies, scientific research, software development, electronics, and telecommunications)
You are fine with eventually selling your company, and you have an exit plan if you do sell
You can see your company going public at some point, and you have considered the pros and cons of doing so
You are okay with divesting some control over and stake in your company to an investor (control freaks and VCs aren’t a good mix)
You are a serial entrepreneur (or aspire to be one); that is, you develop companies with a plan to sell them or take them public and then start another one
You have a lot of business connections, and, ideally, some of these connections are in VC
Your company is located in or near a venture capital hotspot (such as the Bay Area, Silicon Valley, LA, NYC, etc.)
If Venture Capital Is The Right Fit: Next Steps
Do you fit the above criteria? Here’s what the process of obtaining venture capital might look like for you.
The beginning of your venture capital journey is all about finding the perfect fit. It’s a lot different than getting a bank loan, where you simply apply to various lending institutions that provide financing for a variety of business types. With venture capital, you need to find an investor that caters to your specific type of business in your particular stage of growth â for example, semi-established fintech companies or healthcare technology companies that haven’t gone to market yet. Location matters, too â whether your company is based in the Bay Area, Silicon Valley, or elsewhere, you will want to find and nurture VC contacts in your local market.
Once you have found a suitable VC firm to approach â and, ideally, you should already have a relationship with this firm rather than contacting them out of the blue â you can pitch your idea/company and see if they will consider funding you. If it’s a good fit, and they decide to move forward and invest in you, the investor will perform a valuation of your company, both before and after the cash infusion. The valuation will determine the percentage of stock the VCs will own in the company and may also determine the amount of influence the investors have in steering the company before your IPO or sale.
Stages Of Funding
After a deal has been agreed on, funding begins. This usually happens in several rounds, the first of which is called seed funding. Seed capital is meant to get a very new business off the ground (the average seed round is $2.2 million) and may be used to do things, such as develop a prototype, assemble a management team, or create a business plan. Successive rounds of funding, called series, may become available as the business expands. Series A funding and Series B funding, for example, focus on somewhat-established businesses that are already offering a product and have a customer base, whereas Series C funding helps mature companies expand or even acquire other companies. Different venture capital firms usually cater to different specific phases.
From sending your pitch deck to attending meetings with investors to performing due diligence, it can take from six to nine months or longer to get your first round of seed funding.
Learn About Other Types Of Financing For Startups & Entrepreneurs
If VC isnât the right fit, that’s okay. There are many other types of financing that might be better suited for your small business. Some options include small business loans, small business grants, crowdfunded loans, personal loans, and lines of credit. Start your research by checking out these resources with relevant information about various forms of startup financing.
8 Alternative Funding Sources If Venture Capital Isn’t The Right Fit For Your Startup Or Small Business
6 Financing Options For Up & Coming Entrepreneurs (Plus 4 Expert Funding Tips To Get You Started)
20 Best Ways To Finance A Business Start-Up
What Is Venture Debt & Is It The Right Type Of Financing For My Startup Business?
What Is Debt Crowdfunding & When Is It The Right Choice For My Small Business?
Small Business Startup Loans: Your 8 Best Options
Do I Qualify For A Startup Grant?
The post What Is Venture Capital & How Does It Work? appeared first on Merchant Maverick.
If you’ve spent any time here on the Merchant Maverick website, you already know what most business owners are looking for: funding. Sure, we all want to be successful and fulfilled by doing what we love, but the only way businesses can do that is with access to capital.
Of course, you can always hit up your local bank or credit union, search around the web for online lenders, or launch a crowdfunding campaign. But why limit yourself to these options when you can attract investors that bring capital, industry experience, and so much more to help your startup business grow.
Whether your startup is already showing signs of success or your business is still just a plan for the future, if you’re interested in how investors can help you take your business to the next level, then this article is for you. In this post, we’re focusing on two types of investors: venture capitalists and angel investors.
It doesn’t matter if you have a little bit of knowledge about these investors, or you’ve only heard them mentioned in news articles. This post breaks down the definition of each, explores the differences between the two, and even offers recommendations for how to choose the best option to fit your business’s needs. So sit back, relax, and let’s jump in.
What Are Venture Capitalists?
A venture capitalist is an investor or firm that gives businesses the money they need to grow from a fund â a pool of money from multiple people. Unlike a traditional loan, this capital doesn’t get repaid on a set schedule. Instead, the investor receives equity in the company â in other words, ownership within the company. We’ll explore equity and what it means a little later.
Venture capitalists typically invest in businesses that have high growth potential. Businesses that receive capital from venture capitalists should be poised to move quickly to grow and expand. Most often, businesses that are funded by venture capitalists are already somewhat established.
What Are Angel Investors?
An angel investor is a little bit different from a venture capitalist. An angel investor is an individual (or in some cases, a group of people) that is well-off and wants to invest in a business in exchange for equity or convertible debt. The invested capital doesn’t come from a fund but instead comes directly from the angel investor.
Angel investors also typically gravitate toward companies with high growth potential. However, angel investors are more willing to take on higher-risk businesses, such as startups and early-stage businesses.
Angel Investors VS Venture Capitalists: Key Differences
Are you still scratching your head? Let’s break down the definitions of angel investors and venture capitalists, then take a look at the key differences between the two.
When you work with a venture capitalist, you will work with a venture capital firm or employee of a venture capital firm. This individual or group uses a pooled fund to provide businesses with capital. The pool could include funds from corporations, university endowments, pension funds, and/or other big investors.
If you work with an angel investor, you will receive capital from a successful, wealthy individual or even a group of well-off individuals. This money doesn’t come from a fund but instead comes directly from the individual or group. In other words, they are using their own money, not someone else’s.
Angel investors are not required to be accredited, but many are, which means that they either earned $200,000 per year over the last several years or have a net worth exceeding $1 million.
Types Of Businesses
Venture capitalists provide capital to businesses with high growth potential. These businesses are typically in a position to grow quite rapidly and have already shown a history of success. These businesses can be in a variety of industries, from food startups to up-and-coming technology.
Angel investors, on the other hand, are more willing to work with businesses in their very early stages. Once a business has used other methods of funding, such as friends and family, small business loans, or crowdfunding, it may opt to seek capital from an angel investor before working with a venture capitalist.
Angel investors typically invest in businesses that they are familiar with. Someone who made their money off software or real estate, for example, would be more apt to invest in a new software company or real estate venture.
Another big difference between venture capitalists and angel investors is how much they are willing to invest.
One thing to note is that the amount invested varies based on a number of factors, so these are just a few averages to give you a better understanding of what type of capital each kind of investor is willing to invest.
Venture capitalists invest a much higher amount of money â think millions of dollars. On the flip side, angel investors are more conservative, investing, on average, about $25,000 to $100,000 per company.
Equity & Convertible Debt
Whether you receive capital from a venture capitalist or an angel investor, the repayment terms are different from other forms of business funding (such as business loans). Business loans and lines of credit are types of debt financing. That means the business repays the money it borrowed as well as fees and interest assigned by the lender.
Capital received from venture capitalists and angel investors is known as equity financing. Instead of repaying borrowed funds, the investor receives an ownership stake in the business. This means the investor is entitled to a share of the profits and may also be able to make important decisions regarding the business.
How much equity exactly? Well, it depends on multiple factors, including the amount of the investment and the expected return. To get a general idea, venture capitalists may expect equity from 10% to 80%. That’s a very large range, but again, there are multiple factors to consider, and every deal is different.
Angel investors generally expect equity of 20% to 50%. While this can be quite a large share of ownership, remember that these investors are more apt to take on riskier businesses in very early stages.
While both types of investors are repaid through equity, there is one minor difference between the two. In some cases, a borrowing agreement with an angel investor may include convertible debt. Convertible debt is debt that can later be converted to equity â ownership in the business â at a later time as agreed upon by the investor and the borrower.
Now, what happens if the business isn’t successful? Will you be required to pay back the investment made in your business? The good news is that no, you won’t necessarily be on the hook for repaying your investors. However, the investors could liquidate your business and collect all or a portion of their investment if your business fails.
One of the biggest advantages of having an angel investor or venture capitalist back your business is that you can obtain more than just capital. While the resources available to you vary depending on your industry and the investor you work with, your investor may have ways that can help fuel growth and improve your odds for success.
In addition to the capital you’ll receive from a venture capitalist, these investors can also help you build industry connections or even find access to other sources of funding.
Angel investors â particularly those that stick with what they know â can often serve as mentors. An investor that made millions in real estate, for instance, can teach you the ins and outs of the business, share industry secrets with you, and help your real-estate-focused company grow.
Which Is Best For My Startup Financing Needs?
Are you ready to take your startup to the next level by seeking out an investor? Before you do, understand which type of investor is best for your business. Know the needs of your business, understand what to look for, and you’ll be ready to take the next step toward getting funding.
Look For Venture Capital If…
Your business has tapped into all other financial resources, including friends and family, crowdfunding, and other types of funding
Your business is at least somewhat established and is poised to grow once you have secured an investor
Your business is very innovative and/or has high growth potential
Your business needs a large amount of capital â for example, $1 million or even more
Your business is positioned to see a large amount of growth and profit that’s worth investing in
You’re prepared to give up equity and control within your business
Look For Angel Investing If…
You’ve used some financial resources, but you’re not yet ready for venture capital
Your business is new or in the very early stages
Your business needs a smaller amount of capital to grow
You’re prepared to give up equity and/or take on convertible debt
In addition to capital, you want your investor to bring industry experience and knowledge to the table
Learn More About Angel & VC Funding
Still undecided on which path to take? Or perhaps you just want to know more about these two forms of alternative funding. If so, check out our other great resources about angel investors and venture capitalists. As with any other type of business funding, make sure to do your research, explore all options, and weigh out the pros and cons. Good luck!
The post Angel Investors VS Venture Capitalists: Whatâs The Difference & Which Is Right For Your Startup? appeared first on Merchant Maverick.
Whether youâve already launched your small business or are still in the early planning phases, you might be exploring different funding options to get off the ground, expand, or weather tough times. There are many options for funding a small business, and it can be challenging to know where to start.
When internal capital isnât enough to cover costs, many small businesses take out loans. Before diving in and taking on debt, itâs helpful to familiarize yourself with some of the more complicated terms and lingo youâll encounter when searching for small business loans.
A debt covenant is one such term you will likely come across. Letâs take an in-depth look at what debt covenants mean for a small business loan, why theyâre used, and how to determine if their conditions are a fit for your needs.
What Is A Debt Covenant?
Debt covenants come in various forms, but they can be broadly characterized as a set of restrictions or agreements between a borrower and a lending institution or creditor. They may also be referred to as banking covenants, financial covenants, and loan covenants.
The terms of a debt covenant are disclosed before a loan is granted. Typically, borrowers must abide by the covenantâs terms until the loan is repaid. If the borrower violates these conditions, the lender may have the authority to impose penalties, terminate the loan, or intervene in some other capacity.
Why Lenders Use Debt Covenants
When financial institutions, creditors, or any lender grant a loan, they are doing so based on an evaluation of the borrowerâs ability to pay the loan back with interest. Therefore, it should come as no surprise that lenders aim to minimize the risk of borrowers defaulting on their loans.
Covenants are one tool at a lender’s disposal to better ensure that a borrower operates their businesses in a way that will increase the likelihood of repaying the loan on time. First, these agreements establish clear terms, such as expectations and permitted financial behavior, with the intention of getting all parties involved on the same page. Additionally, covenants usually outline measures that the lender can take if the agreed-upon terms are violated. Some examples include the following:
Charging penalties or fees
Increasing the loanâs interest rate
Increasing the total collateral
Terminating the loan entirely
Altogether, these measures are a way for the lender to reduce risk and recuperate losses in the event that a borrower fails to repay a loan.
How Covenants Work
The details of a covenant will depend on the lending institution and the financial status of the small business seeking a loan. But essentially, a debt covenant can be thought of as the rules and conditions the borrower must follow and fulfill until the loan is repaid.
Many aspects of covenants coincide with the successful financial and legal operation of a business, including a positive growth rate and compliance with tax law. Some more complex debt covenant criteria you may encounter include:
Debt-to-Equity Ratio: Using the formula (Total Liabilities / Total Shareholdersâ Equity), this metric shows to what extent a small business is financing itself with debt compared to its own funds.
Debt Service Coverage Ratio: This measures a businessâs cash flow, and is calculated by dividing net operating income by the current yearâs debt obligations.
Total Assets: This includes the total value of cash, land, equipment, and inventory that a small business possesses.
A covenant may set a specific threshold for any of these criteria that a business must stay above or below.
Typically, there will be some grace period to correct and remedy a violation, and more understanding lenders may be willing to enter into a discussion or negotiate with borrowers on how theyâll move forward with the agreement. If a violation does result in a penalty, there will likely be successive stages of enforcement, beginning with small fees before escalating to the termination of a loan.
Types Of Covenants
Covenants can be sorted into two distinct categories: positive and negative. The key difference is that positive covenants are things that borrowers must do, whereas negative covenants represent what you cannot do during a loanâs lifetime.
Largely known as positive covenants, you may also see these referred to as affirmative covenants. Here are some examples of positive covenants in the context of a small business:
Maintaining satisfactory financial ratios, such as profit ratio, debt-to-equity ratio, and debt service coverage ratio.
Keeping a specified minimum amount of cash.
Providing accurate financial statements on time and according to schedule.
Providing life insurance for designated employees
These types of covenants are designed to prohibit behavior that could pose a potential risk to the success of the borrowerâs small business and loan repayment. Some possible examples include the following:
Selling critical assets like land or buildings to make loan payments.
Changing ownership or merging with another business.
Taking on a large recurring expenditure, such as a lease agreement.
Taking out additional loans or debt.
How Common Are Debt Covenants?
The likelihood of a debt covenant depends on the amount of money borrowed, the timeframe for repayment, and a small businessâs financial background. Emerging small businesses in particular should expect to take on debt covenants to secure a loan with favorable terms.
Is A Debt Covenant A Dealbreaker?
Generally speaking, a debt covenant isnât cause for alarm on its own. Deciding whether a loan is right for you depends on how restrictive the covenants are and the potential risk of violating their conditions.
Itâs important to think through and understand the various scenarios in which your business might breach a covenant and consider the potential risk associated with each. If you believe you and your small business are prepared, then by all means, proceed. However, itâs worth comparing lenders to find terms that align with your needs.
In some cases, a debt covenant may actually pose benefits for borrowers. For instance, accepting debt covenants may help a borrower negotiate a lower interest rate or reduce associated fees since the lender has more assurances that the loan will be repaid. Additionally, these covenants may help small business owners better monitor their financial wellbeing and make improvements and adjustments accordingly.
Debt Covenants: The Bottom Line
Debt covenants cover a wide range of financial, legal, and operational agreements between a lender and borrower. Though they come with some caveats, debt covenants can help get your business on track and assist you in acquiring funding. Having a clear understanding of your small businessâs current debt and finances can help determine whether a debt covenant is beneficial and feasible for you.
The post Is A Debt Covenant A Dealbreaker? What Covenants Are & Why Theyâre Required For Small Business Loans appeared first on Merchant Maverick.
eBay merchants running short on funds will soon be able to tap into a new financing solution: eBay Seller Capital.
Announced Wednesday, this program aims to provide needy eBay sellers with a shot of cash via online lender LendingPoint’s financing tools, according to a joint press release by eBay and LendingPoint.
“We’re committed to empowering entrepreneurs to make their dreams a reality, and we are continuing to partner with our sellers to provide them with the tools they need to thrive,” eBay’s Vice President of Global Payments Alyssa Cutright said in a statement. “The program with LendingPoint will enable critical funding opportunities for eBay sellers, especially during this time of economic uncertainty.”
Related: Over Half Of US Businesses Claim PPP Wasnât Enough, Survey Says
Hints at a potential eBay-LendingPoint team-up had floated around for a couple of weeks — the program’s landing page was live by at least July 18, per an EcommerceBytes article.
eBay Seller Capital is now live in the form of an invite-only pilot program available for “select sellers.” eBay promises that this program will open to all eligible US-based sellers “later this year.”
At launch, eligible sellers may be able to receive between $500 and $25,000 in funding within one business day. Later in the fall, the maximum loan cap will be bumped up to $500,000.
Loans through eBay Seller Capital come with flexible term lengths of up to 48 months. LendingPoint also won’t charge borrowers origination or early payback fees.
A working capital option is also in the works (it’s slated to be “coming soon”). This feature will allow sellers to repay loans based on a percentage of their eBay sales.
eBay further highlights the fact that the financing program won’t impact applicants’ credit scores. Instead of running a hard credit pull (which can harm scores), LendingPoint will use a soft credit inquiry, which does not affect credit scores and won’t show up to third parties on credit reports.
“LendingPointâs purpose is to accelerate and democratize commerce,” said LendingPoint’s CEO and co-founder Tom Burnside. “We are thrilled to be able to use the data and technology we have built into our platform to help eBay sellers achieve their dreams.”
eBay has stated that it and LendingPoint hope to “expand their offering” in the future, although what exactly this may entail is not clear at this time.
Previous eBay Seller Financing Experiments
eBay’s latest seller financing attempt is far from its first foray into the sector.
Back in 2018, the online marketplace teamed up with Square Capital to offer loans ranging between $500 and $100,000. That partnership seemed to peter out sometime in 2019. eBay is certainly no longer marketing the relationship.
Sellers could also tap into PayPal Working Capital, which worked tidily with eBay by automatically deducting payments from sellers’ PayPal accounts. However, with eBay’s operating agreement with PayPal ending last month, sellers now have to manually make payments for loans through the PayPal Working Capital program.
The death knell of eBay and PayPal’s relationship is actually one of the key selling points for eBay Seller Capital. eBay notes that this financing program will work in tandem with its new managed payments platform, which was introduced by the online marketplace to replace PayPal’s payments system.
With both the Square Capital and PayPal ventures fizzling out, it looks like eBay Seller Capital will be the primary method for merchants looking to dip into a stream of cash — at least for the immediate future.
Alternative Funding For eBay Sellers
This new financing program isn’t the only funding option for eBay merchants. Check out Merchant Maverick’s guide to the best funding options for eBay sellers for a deep dive into the topic.
For more general financing tips, visit our guide to the best small business loans.
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Let’s imagine a scenario. Your business needs capital now. You’ve applied for a loan with your bank, but the lender tells you that it could be weeks before you get your funds. You like the low rates and favorable terms of the loan, but you don’t want to play the waiting game. Anything can happen in the time it takes for your loan to be disbursed, and you could find yourself in a cash crunch that jeopardizes business operations.
On the other hand, you could go to an alternative lender and receive funding with a much shorter turnaround â even as quickly as the next day. The downside, though, is that a high-interest rate, additional fees, and shorter repayment terms mean that your loan will be more expensive â which could also negatively impact your business.
Fortunately, you aren’t stuck with these two choices. There is a way to get the funding you need now while waiting for your long-term loan. That option is called a commercial bridge loan.
If you need a way to cover gaps in cash flow while waiting for your loan disbursement, keep reading because a bridge loan may be exactly what you’re looking for.
What Is A Commercial Bridge Loan & What Are They Used For?
A commercial bridge loan is a type of short-term loan that businesses use as they seek a more long-term funding option. This loan bridges the gap in cash flow between the time a business applies for funding to the time that funds are disbursed.
Commercial bridge loans are used for a number of purposes. Most commonly, these loans are used to secure commercial real estate quickly. If a business owner finds a great deal on an office building, securing a mortgage or other real estate loan is time-consuming, and they could miss out on this opportunity. With bridge funding, the business owner could secure short-term funding quickly, purchase the property, and have time to secure a low-cost, long-term loan.
Bridge loans can also be used to fund the cost of renovations, either for your own commercial real estate or for investment properties. Other large purchases, such as equipment, can also be purchased with bridge loans. Another way that bridge loans are used is when acquiring another business.
The most important thing to remember is that a bridge loan is a temporary funding solution. Loan terms are often quite short, and interest rates can be high, so you want to pay this type of loan off as soon as possible by securing low-interest, long-term financing elsewhere.
How Commercial Bridge Loans Work
A commercial bridge loan works similar to other business loans. The business owner applies with a lender, provides information and documentation required to close the loan, and receives funding quickly â sometimes in just a matter of days.
The lender will consider several factors before approving an application, which we’ll discuss in more detail in a later section. For now, though, one thing that the lender will look at is the loan-to-cost (LTC). The LTC is the maximum percentage of the total cost that the lender will give to a borrower. For most lenders, the LTC is 70% to 80%.
Let’s look at an example. You want to purchase a property that is priced at $100,000. The lender is willing to offer a bridge loan of 80% LTC. This means that the lender will provide you with a loan of $80,000, while you will be required to come up with the remaining $20,000.
The lender will set the rates and terms for your bridge loan (more on that later). Once your loan is approved, funds will be disbursed so that you can make your purchase. If you bought the property from the example above, you would make payments as agreed until you secure a mortgage or other long-term funding that covers the principal, interest, and any fees required by the lender.
Another thing to note is that the property being purchased with loan funds is typically the collateral that secures the loan. That means if you default on your agreement to repay the lender, the lender has the right to seize and sell the property to recoup its losses.
Typical Bridge Loan Terms
Bridge loans are temporary, short-term solutions to cash flow problems. Most bridge loans have repayment terms of one year or less. Some lenders may provide bridge loans with longer terms, but these generally will not exceed two years. Many bridge loans will need to be repaid in just a matter of months, giving you enough time to secure more permanent financing.
Typical Bridge Loan Rates
As with any type of business funding, terms vary by lender. However, you should go into bridge loans knowing that the rates are higher than your average loan. Expect to pay at least double the prime rate or roughly 8% to 11%. Since terms for bridge loans are so short, lenders use high rates to make money off their investments.
The interest isn’t all that you have to think about, either. Most bridge loans have numerous fees that must be paid. These include:
A prepayment fee may also be applied if you pay your loan off early, so make sure to ask your lender about this fee and any other applicable fees that may increase your cost of borrowing.
What You Need To Qualify For A Bridge Loan
The requirements for obtaining a bridge loan varies from lender to lender. However, these loans may not have requirements that are as strict as traditional bank loans, which is why so many businesses use them as short-term solutions until a more favorable loan can be obtained. In exchange, though, the cost of borrowing is much higher than other financial products. You must also be able to secure long-term financing before your loan is due, or you risk losing your collateral â typically, the property purchased with loan funds.
Most lenders will look for the following when determining whether to approve a loan application:
Affordability: Lenders will consider various factors, including your debt-to-income ratio (DTI) and your debt coverage service ratio (DCSR), to determine if your cash flow is sufficient to cover current obligations plus any costs associated with your new loan.
Equity: A bridge loan will only provide around 70% to 80% of the cost of your purchase. You will need to have the remaining 20% to 30% available to complete your purchase.
Property Being Purchased: Lenders will look at what you are using your loan funds for. If you’re purchasing commercial real estate, for example, the lender may consider factors, such as the location of the property, its condition, and existing liens.
Credit History: If you have a low credit score, this doesn’t necessarily disqualify you from receiving a bridge loan. However, lenders may look at your past credit history to determine if derogatory marks â bankruptcies, foreclosures, and liens, for example â make you a risky borrower.
Is A Commercial Bridge Loan Right For Your Business?
A commercial bridge loan isn’t the right choice for every business. How do you determine if your business will benefit from a bridge loan? There are a few things to consider.
First, think about why you need funds. If you want a long-term solution for cash flow issues, a commercial bridge loan isn’t a good fit. However, if you need funds for one of these reasons, consider speaking with a lender:
Close A Deal Quickly: When the real estate market is hot, you have to strike quickly, or you’ll get left out in the cold. Lining up a mortgage or long-term loan can take weeks or even longer, and by that time, you may have lost out to another buyer. If you want to purchase a commercial property fast, you can get the funds you need with a commercial bridge loan, which buys you enough time to secure another source of funding.
Work On Your Credit: Is your credit preventing you from getting a mortgage or a bank loan? If so, making a purchase using a bridge loan may be a wise choice. If you need to make a purchase now but also need to work on your credit (i.e., paying off debt or disputing erroneous items on your credit reports), bridge loans provide you with the capital you need until you’re able to clean up your credit and obtain another loan.
Acquire A Business: If you plan to purchase another business, time is of the essence. Instead of waiting on funding, a bridge loan can help you push the deal forward quickly.
Renovate Your Property: If you want to improve your business to draw in new customers, a bridge loan can help you get the ball rolling on renovations sooner rather than later.
Where To Find Lenders That Offer Bridge Loans
Does a bridge loan seem like a good fit for your business? If so, the next step is to find your lender. Where do you get started? Try these options.
Banks: Many traditional banks offer commercial bridge loans. Start by speaking with any institutions that you currently have working relationships with. Even if your bank offers bridge loans, make sure to check out other options in your area to find the best terms and lowest rates.
Credit Unions: Credit unions that offer commercial products and services may provide bridge loans. Start with your credit union, or search for ones in your area to find the institution that best fits your needs.
Hard Money Lenders: Hard money lenders are private investors that may offer short-term bridge loans. The good thing about hard money lenders is that they often put the value of the property over factors such as credit history. The downside is that they may have higher rates than other lenders. Make sure to compare your options and only work with reputable hard money lenders.
Alternative Lenders: Some online lenders specialize in bridge loans and other short-term funding. These loans typically have quick turnaround times, and you never even have to leave your office to get the money you need.
Learn About Other Types Of Financing For Small Businesses
If a bridge loan isn’t quite the right fit for your financial situation, take heart â there are numerous other options available to help you score the capital you need. Check out our great resources, starting with the 12 Different Types Of Small Business Loans You Should Know. From affordable SBA loans to flexible lines of credit, there’s something for everyone. Then, shop your options by checking out our small business loan reviews. Once you’ve narrowed down your choices, make sure that you fully understand the loans, terms, and costs of borrowing so that you can take your business to the next level without drowning in a sea of debt. Good luck!
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When you think about small business lending, what comes to mind? If you’re like most people, you probably think of the typical — banks, credit unions, online lenders. Unfortunately though, many business owners are unable to obtain the funding they need through these traditional lending institutions. Banks and credit unions, for example, may require high credit scores, a lengthy time in business, or other criteria that a borrower just does not meet. The same can be said of online lenders — those with competitive rates may have strict borrowing requirements, leaving business owners with options that are short term, expensive, and could lead to escalating debt — and eventual closure of the business.
Unfortunately, businesses in underserved communities probably know this all too well. Not only does a lack of funding opportunities impact businesses, but it also has a negative effect on the community as a whole: A lack of jobs, less access to products and services, and fewer opportunities for entrepreneurship.
There is good news, though. There are lenders and institutions that offer funding opportunities to businesses and entrepreneurs that don’t have other options. One option many are unfamiliar with is minority depository institutions, or MDIs. These institutions provide funding opportunities to many business owners who don’t have access to affordable funding elsewhere.
Sound like something that might be a good fit for your business?
Keep reading to learn more about MDIs, how they help businesses like yours, and how to determine which one is the right fit for your business.
What Are Minority Depository Institutions?
A minority depository institution (MDI) is defined in one of two ways:
At least 51% of voting stock is owned by minorities OR
A majority of the board members are minorities AND the institution primarily serves communities whose populations are predominantly minority based.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a minority is defined as “Black American, Asian American, Hispanic American, or Native American.”
MDIs are similar to other banks, credit unions, and financial institutions by offering consumer and business services such as checking and savings accounts, business and personal credit cards, mortgages, and small business loans and lines of credit.
What Is The Minority Depository Institution Program?
The Minority Depository Institution Program is a program launched under the Federal Deposit Insurance Company (FDIC). Goals of this program include preserving, promoting, and building capacity of MDIs for the benefit of low- and moderate-income communities.
The FDIC also oversees the Minority Depository Institutions (MDI) Subcommittee of FDIC’s Advisory Committee on Community Banking (CBAC) as a way of preserving and promoting the importance of MDIs in communities around the nation. This subcommittee serves as a platform for MDIs to collaborate, form partnerships, and promote best practices.
In order to become classified as an MDI, an institution must take steps by applying for deposit insurance and also meet the criteria discussed earlier in this post. The FDIC provides a number of resources outlining the application process, rules, regulations, and other critical information that financial institutions need to know about MDI designation.
How Minority Depository Institutions Help Small Businesses
There are a number of ways that minority deposit institutions help small businesses. One of the most important ways that these financial institutions help small businesses is by providing financial products that may otherwise be unavailable to low-income, moderate-income, and other underserved communities. By having access to funding opportunities, business owners are able to expand their businesses, receive funding to keep their business in operations, and start new businesses. This, in turn, leads to new job opportunities and access to products and services to everyone within that community.
Some of the ways that MDIs help business owners include:
Small Business Loans
Affordable loans with favorable terms are difficult for many businesses to score, but it can be nearly impossible for businesses in underserved communities. Fortunately, MDIs have financing opportunities for small businesses that find it difficult to get low-cost funding elsewhere.
Depending on the institution, there are a number of loan products available. This includes commercial real estate loans, equipment financing, or other loans that provide businesses with a lump sum of capital that’s repaid over time.
Many MDIs offer loans backed by the Small Business Administration. SBA loans are known for their high borrowing limits, long repayment terms, and competitive interest rates. Some MDIs may also offer financial products for startup businesses that don’t have the revenue or business credit score required for other loans.
Lines Of Credit
Businesses that want a more flexible financing option may qualify for a line of credit through an MDI. Instead of a lump sum, businesses are given a credit limit that can be used to pay employees, purchase supplies or inventory, or cover operational costs. As the line of credit is repaid, funds become available to use again, much like a credit card. A business line of credit is great to have to cover unexpected expenses or to manage cash flow issues.
Business Credit Cards
Many MDIs offer business credit cards to qualified borrowers. Like a line of credit, this is a flexible form of funding that can be used for anything from emergency expenses to recurring costs like utility bills or gas for a company vehicle.
Merchant Card Services
Businesses that want to accept credit cards, debit cards, and other forms of payment will need to find a merchant services provider. Some MDIs provide these services for their customers.
Businesses with employees have to run payroll, and many business owners opt to leave this task to the professionals. Many MDIs — like traditional banks and credit unions — offer payroll services for its small business customers.
Checking & Savings Accounts
Business owners should understand the importance of separating business and personal expenses. The easiest way to do this is by keeping funds in separate accounts. An MDI provides personal and business bank accounts, so you can keep your money separate. Not only will you (or your accountant) be grateful for separate accounts come tax time, but many lenders require you to have a business bank account before disbursing loans or other funding.
Personal Banking Services
Looking for a new financial institution for your personal accounts? Consider working with an MDI. Not only can you take advantage of these consumer financial products, but so can others in your community. What does that mean for your business? It means that consumers have access to bank accounts, credit cards, and loans — in other words, all types of funding that they may spend in your business.
Popular Minority Depository Institutions
Now that you have a general idea of what MDIs offer, let’s take a closer look into what to expect when working with an MDI. These are just a handful of the 150+ MDIs throughout the nation, and they were chosen for this post because of their years of success, an array of financial products and services, and the work they have done within their respective communities.
First Independence Bank
First Independence Bank is a Black-owned MDI that provides financial products and services to individuals and businesses in the Detroit Metropolitan area. This institution was launched in 1970 and has helped businesses of all sizes meet their financial goals with products such as commercial real estate loans, term loans, SBA loans, and secured lines of credit.
First Independence Bank is also the majority owner of MAC Leasing, a certified minority-owned equipment leasing company. In addition to its MDI status, First Independence Bank also meets the requirements for classification as a Community Development Financial Institution (CDFI). It is also a certified Minority Business Enterprise (MBE). First Independence Bank has won numerous Bank Enterprise Awards throughout the years for its role in providing financial products and services to distressed communities.
American First National Bank
American First National Bank is an Asian American-owned MDI that serves businesses and consumers throughout communities in Texas, Nevada, and California. Launched in 1998, this financial institution has grown to have total assets of nearly $2 billion.
In addition to being Asian American-owned, most employees within American First National Bank are also Asian American. Many employees speak multiple languages, giving them the ability to serve a variety of different customers in their native languages. American First National Bank has numerous financial products geared toward small businesses, including working capital loans, startup loans, and equipment loans.
This MDI is also very active within its communities, even offering speakers to speak about the bank and its services at schools, local businesses, and civic organizations.
Golden Bank, National Association
Golden Bank was established in 1985 and was the first minority-owned bank in the Greater Houston area. Today, the bank has expanded to serve customers in cities in Texas and California. This Asian-owned financial institution offers a number of business services, including business loans, deposits, cash management, and trade finance. Golden Bank even offers payment processing with no startup fees and a free terminal.
Golden Bank in recent years has been named a Five-Star Bank by Bauer Financial. This is the highest ranking in banking industries.
How To Find The Right Minority Depository Institution For Your Small Business
Is your business located in an underserved community? Do you need help with funds for starting your business, or perhaps you’re already in business and need capital for expansion? If your business is located in an underserved, distressed, low-income, or moderate-income community, you may benefit from the products and services offered by an MDI. Or maybe you just want to bypass the big-name banks and get a more personalized experience with a smaller, local institution — in which case, an MDI fits the bill.
Now, the next step is to find the right MDI for your business. Your business is unique and so are its financial needs. What works for one business may be a total mismatch for yours. To determine what MDI is the right fit for you, consider the following:
Location: Unlike major financial institutions that have hundreds (or thousands!) of branches nationwide, MDIs have far fewer branches and serve a more targeted area. Make sure that the MDI you select has branches and surcharge-free ATMs that are convenient to your business.
Eligibility: Some MDIs are credit unions that have membership requirements. This could be anything from a small monetary donation to living, working, or attending school in a specific area. Make sure that you meet all requirements before signing up.
Products & Services: Do you need industry-specific financial products? Is there a specific type of loan or borrowing limit that you need for your business? If so, make sure that the MDI you select offers the products you need, plus other products and services your business may require in the future.
Up-to-Date Technology: Most business owners don’t have hours to step into a branch or sit in a drive-through line for every single transaction. Look for MDIs that offer online banking services like access to your accounts, mobile services, bill pay, and online loan applications.
Also, FDIC-insured MDIs offer you protection you need in the event that the institution fails. You’ll have up to $250,000 insured, so you won’t have to worry about losing your hard-earned money.
Unsure of where to start your search? Check out the FDIC website, or review the list of MDIs supervised by the Office of the Comptroller of Currency (OCC) to get started.
Learn About Other Financing Resources For Businesses
Smaller financial institutions like MDIs aren’t for everyone, and it’s important to always explore your options first before diving headfirst into small business financing. While MDIs may be on your list, make sure to compare and weigh your other options. This includes working with a traditional bank or credit union, comparing rates with online lenders, or working with an SBA-approved lender to get a low-cost SBA loan. You can even use your personal credit profile and income to qualify for a personal loan for business. Regardless of which choice you make, take your time, do your research, and make the choice that’s best for your business. Good luck!
The post How A Minority Depository Institution Could Help Your Small Business Get Loans, Financing, & Other Services appeared first on Merchant Maverick.
You have a great idea, and you’re ready to take action and turn that idea into a thriving business. Maybe you have a new product that’s unlike anything on the market, or you’ve hashed out the details of a much-needed business in your area. No matter what type of business you have in mind, all startups have one thing in common: the need for capital.
Unfortunately, new businesses find it challenging to find funding. You can’t just walk into your local bank, produce a few financial statements, and get a business loan. A lack of revenue and business credit history works against you, as traditional lenders see you as a big risk.
However, this doesn’t mean you have to put your dreams on hold. It simply means that you need to get a little creative with your funding. Not sure where to start? You’re in the right place. This post is going to focus on startup funding.
This goes beyond just small business loans. We’ll look at a few unique types of funding for your business, as well as provide you with tips to get started. Use these ideas to get the money you need to get your business off the ground. Ready to get started? Let’s dive right in.
Use Startup Funding To Take Your New Business To The Next Level
Before we delve into the different types of funding, let’s first evaluate why you need startup funding for your business.
Every business needs capital. The amount of capital you need varies based on a number of factors. Your type of business, specifically, influences your costs. If you’re creating a new product, your initial startup costs will differ from those of someone opening a store or restaurant. An online business will have different costs than a brick-and-mortar business. One of the first steps to launching your startup is to identify potential costs and then estimate how much capital you need to cover the costs to get your business off the ground.
When launching your business, some of the startup costs to keep in mind include:
Rent or mortgage
Supplies & inventory
Research & development
Securing capital is the first step to launching a successful business. Just take a look at some of the businesses and products you may already be familiar with. The wildly successful card game Exploding Kittens had one of the biggest Kickstarter campaigns in history, raising over $8.7 million in 2015. Since its launch, its become a top-selling game across retailers such as Amazon and Target with over 9 million games sold. Expansion packs and other card games are also available, making this business even more successful.
Or perhaps you’ve heard of the food delivery service Grubhub. By 2011, the company had received five rounds of investment funding, transforming the company from one that simply offered online restaurant menus to a food delivery service in cities across the nation. Grubhub was just sold to Dutch company Just Eat Takeaway.com for a cool $7.3 billion.
Maybe you want to grow your business this large … or maybe you just want to kick your 9-to-5 to the curb, make your own money, and be your own boss. Whatever your ultimate goal is, securing funds can help you get there.
How Does Startup Funding Work?
There are two main types of startup funding to consider: debt financing and equity financing. There are a number of funding sources that fall under each umbrella, but for now, let’s focus on the general meaning of each.
Debt financing means that you receive a lump sum of money that is paid back over a period of time. In addition to paying the principal (in other words, what you borrowed), you’ll also pay interest to the lender. You may also be required to pay fees, such as an application fee or origination fee.
Lenders look at several things when determining whether you qualify for funding, the amount you qualify for, and the rates and terms. This may include your personal and/or business credit history, revenue or personal income, and personal or professional references.
There are several types of debt financing to fund your startup, including:
Loans: You receive a lump sum of cash that is paid back over a period of time (anywhere from a few months to 20+ years).
Business Credit Cards: A business credit card works like a personal card. You’re assigned a credit limit by the lender. You can use your card as often as needed provided you haven’t hit your credit limit. Interest is charged only on borrowed funds. As you pay down your balance, funds are once again available to borrow.
Lines Of Credit: Lines of credit are similar to credit cards. A lender approves you for a set amount, which can be used as needed. Interest is charged only on borrowed funds. As you repay your line of credit, funds may become available to use again.
Debt financing has its benefits. Paying back your lender helps build your credit so you can qualify for higher limits and lower rates in the future. Your lender also doesn’t have a stake in your business, so you retain ownership.
On the other side of the coin, there are a few drawbacks to consider. Interest rates and terms — particularly for startups — may be less-than-favorable. If your business doesn’t succeed or you’re otherwise unable to repay your loan as agreed, your credit score will plummet. Your business and/or personal assets may also be at risk if you put up collateral, signed a personal guarantee, or have a blanket lien attached to your loan.
You can also get startup capital through equity financing. Like debt financing, you receive capital to use for startup costs. However, equity financing is different in that you don’t have to repay the funds. Instead, your investor receives a stake in your business in exchange for this capital. In the reality TV series, “Shark Tank,” the sharks invest money in products in exchange for ownership in the company — this is classic equity financing.
The good news is that you won’t have to repay funds, even if your business isn’t a success. The bad news is that you do have to give up partial ownership of your business. Not only does this mean that you have to share the profits, but you may also have to consult with stakeholders before making big decisions, such as making a large purchase or expanding your business.
5 Ways To Get Funding For Your Startup
There are a few ways to get funding for your startup. You may even opt to try several different methods to get the capital you need. Read on to learn more about getting funds for your startup.
Think about a seed. It starts off small. But over time, that seed grows into a plant or tree. Now, think of this seed as your business. The seed money — money given by investors — helps start your business. Over time, your goal is to grow this seed (the investment) into a thriving business.
Because this is a type of equity financing, your investors have a stake in your business in exchange for their seed money. Once your business has grown, the investors may opt to sell their stakes and move on to another opportunity. They may sell it back to you or to other investors that are interested in being a part of your business.
Access To More Capital:Â The sky is the limit when it comes to seed funding. Unlike loans and other more traditional forms of funding, you don’t have to worry about limitations being put on the amount of funding you receive — provided, of course, that you find the right investor.
Requirements:Â No business credit history? Low personal credit score? No revenue from your business? No problem. While some investors may have their own requirements before investing their funds, many are simply looking for the next big idea that has a potential for profit.
No Regular Payments: You won’t have to worry about making regularly scheduled payments and high interest rates and fees when scoring seed funding from investors.
Additional Skills & Knowledge:Â It’s highly likely that your investor will at least have some experience with your industry and can provide valuable skills and knowledge to help you grow your business to its full potential.
Giving Up Part Of Your Business:Â In exchange for funding, your investor will take a percentage of your business. This means that they have a right to some of your profits and, depending on their level of involvement, may be involved in making major business decisions.
Finding An Investor: Finding an investor that is willing to invest in your product/business (and, ultimately, you) can be a challenge. Other sources of funding may be acquired in just a few days…finding an investor can take weeks, months, or even longer.
The internet has changed business funding for the better in many ways. One way is through crowdfunding. You most likely have heard of (or maybe even donated to) campaigns on sites like Kickstarter or GoFundMe. These crowdfunding platforms have opened up financial opportunities for many startup businesses, and yours could be next.
There are two main types of crowdfunding to consider: equity-based and rewards-based. Equity-based crowdfunding means that investors get a stake in your business in exchange for their financial contributions. Rewards-based crowdfunding provides each investor with a reward or perk — think, first dibs on a new product or a deeply discounted price at launch.
Few Limitations:Â You won’t encounter maximum funding limits like you would with loans or traditional financing. Although some crowdfunding platforms do have limitations in place, ultimately you can find a platform that lets you raise as much capital as you need — no matter how much that is.
Keep Your Equity:Â If you opt to run a rewards-based campaign, you don’t have to give up ownership in your business.
Tests & Builds Your Market:Â In addition to drawing in interested investors, you’re also putting your name out there to others — even those that don’t contribute — to begin building interest in your business before you even launch.
Requires A Lot Of Work:Â Crowdfunding isn’t as simple as starting a campaign and waiting for the money to roll in. Instead, you will need to promote your campaign through social media, email, your website, or through other means in order to successfully raise funds for your business.
May Not Be Successful:Â Sure, you didn’t raise all the money you needed, but you raised some, so that’s okay, right? It depends on what platform you used. Some platforms require you to meet your goal in a set period of time in order to receive your funds. If you fall short, you’re back at square one.
Negotiate With Suppliers
Another way to get your startup off the ground is to negotiate with suppliers. If you need supplies to create a product or open your business, negotiating is a smart tactic you need to master.
First, start by estimating supply costs. Get quotes from suppliers, do your research, and understand what costs are associated with your supplies. Next, find reputable suppliers and begin negotiations. If their pricing is too high, for example, use the data from your research to get a better deal. You can also inquire about discounts — i.e., for bulk or recurring orders.
Next, consider the payment terms. If payment is due immediately, try to negotiate net-30 terms; in other words, your payment will be due in 30 days. If the supplier isn’t willing to extend terms this much, even net-10 or net-5 terms can be helpful as you try to secure financing, sell products, or find an investor. Some suppliers may even offer in-house credit programs that are easier to qualify for than bank loans or credit cards.
Lenient Requirements: As a startup with no business credit or revenue, proving your creditworthiness is pretty much impossible. But when you work directly with a supplier to get a reduced cost or improved repayment terms, these requirements may not even be a consideration.
Building Business Relationships: As you build relationships with your suppliers, it’s possible that you may get additional discounts, better terms, and other perks in the future.
Doesn’t Always Work: Getting a supplier to come down on the price of products or offer longer repayment terms isn’t guaranteed. Any savings or credit options and the requirements that come with vary by supplier.
Other Funding May Still Be Needed: Even if you get the cost of your supplies negotiated to a more reasonable rate or score longer terms, you’ll still need capital to pay the supplier. If you launch your business and start making cash, great! If not, you may be required to find some form of financing in order to pay for your supplies.
We can’t talk about funding your business without at least mentioning loans. Of course, obtaining a loan through traditional lenders may be difficult, but it isn’t impossible. The Small Business Administration (SBA) offers funding programs for small businesses, including startups and underserved communities. There are also a number of alternative lenders that may be able to help you now or just a few months after you begin bringing in revenue.
Another option to consider outside of small business loans is a personal loan. If you have steady income and a solid personal credit profile, you may be eligible for a personal loan to use toward startup expenses — a loan with longer terms and lower rates than you’ll find with many alternative lenders.
No Hard Work Required: Getting a small business or personal loan is as simple as submitting an application with requested documentation. Lending marketplaces make it easier than ever to compare rates and terms by filling out just one application.
Keep Your Equity: When you receive a loan, you don’t have to give up ownership in your company.
Can Be Expensive: Depending on the lender you select and criteria such as your credit score and income, the interest rates and fees of loans can get pretty expensive.
May Require Collateral: Many lenders require risky borrowers (including startups) to put up collateral for a loan. This could be a specific business asset or personal asset. Some lenders use blanket liens, which covers everything owned by your business. Failure to pay your loan as agreed could result in losing these assets — and putting your business underwater.
Requirements Not Met: Your application may be rejected if you don’t meet the requirements of the lender, which may include business credit score and history, personal credit profile, time in business, revenue, personal income, or type of industry.
Small Business Grants
If you have an innovative business idea, you may qualify for a startup grant. Not only can you score the capital you need with a grant, but funds don’t have to be repaid. However, don’t just think that grants are an easy way to get free money. Most small business grants have pretty strict requirements, so finding ones you qualify to receive is difficult. Once you find grants that are a good fit, competition is pretty stiff — so be prepared.
Startup grants are available for tech companies, innovative new products, and even underserved communities like minority-owned businesses. In addition to submitting information about yourself and your business or product, you may also be required to create a video, write an essay, submit a business plan, or complete other steps before being considered for a grant.
Grants Don’t Have To Be Repaid: You don’t have to worry about repaying a lender if you receive a small business grant. If you qualify and are awarded a grant, funds do not have to repaid.
Not Just Monetary Awards: Depending on the grant that you’re awarded, money isn’t the only thing you’ll receive. Many grants also include access to resources, such as industry-specific workshops, training, and mentorships.
Finding Grants Can Be Difficult: Most grants have requirements that your business may not meet. You also have to keep an eye out for application deadlines to ensure your application is received on time.
Competition Is Tough: You aren’t the only aspiring business owner to seek out grants. Competition is tough, and most people that apply won’t receive a grant, so make sure you have a backup plan in place.
On a farm, an incubator is used to create the perfect environment for the successful hatching of eggs. In business, a startup incubator works in a similar way — metaphorically, of course.
A startup incubator is a program designed to foster the growth of new businesses. An incubator provides a number of resources to help startups grow into a successful business. A single company or organization may act as a startup incubator, but more commonly a number of businesses and organizations come together to provide the resources startups need to succeed.
These programs don’t just open up new opportunities for capital but also may provide your startup with resources including mentorships, office space, and training to ensure your business starts on the right path.
Looking for a startup incubator? Start your search online or contact your local SBA office.
More Than Just Funding: Your business needs funding, and a startup incubator can give you opportunities you couldn’t find on your own. In addition to just capital, though, you can also take advantage of the numerous resources and expertise offered through these programs.
Find Your Focus: The benefits you’ll receive from a startup incubator can help you become more structured and focused on launching and growing your business.
Finding & Being Accepted To A Program: Unfortunately, startup incubators won’t just flock to you. It’s your job to do the research and find incubator programs, learn more about joining, and ensuring you meet all requirements. Once you do find suitable programs, actually being accepted over competing startups is another challenge.
Requires Commitment: Your program may require you to attend training, workshops, or meetings with investors or mentors. This time commitment may prove to be too much if you have other obligations, such as a full-time job.
Tips To Get The Startup Funding You Need
Once you’ve determined the method (or methods) you’ll use to acquire your startup funding, there are a few things you can do now to improve your odds for success. Before reaching out to that lender, investor, or supplier, keep these tips in mind.
Understand The 5 Cs Of Credit
Whether you plan to apply for a business loan now or in the future, it’s important to understand what lenders look for — specifically, the five Cs of credit. Those are:
Character: Lenders want to work with borrowers with good character traits. This may include personal work experience, industry experience, and personal credit history.
Conditions: Are the conditions favorable for lending? Lenders will consider this, looking at things such as industry trends, the state of the economy, and even pending legislation to determine if lending to your business is a smart move.
Collateral: Do you have collateral to secure your loan in the event that you default on your loan agreement? Equipment, real estate, and even accounts receiveable can be used as collateral.
Capital: Have you invested in your business? If so, you have skin in the game and will have something to lose if your business goes under. Lenders will consider how much capital has been invested in your business when determining if you qualify for funding.
Capacity: Does your business have the capacity to take on a loan payment? Lenders will consider factors such as your debt-to-income ratio (DTI), debt service coverage ratio (DSCR), and cash flow to determine if your business is financially prepared to take on additional debt.
Is your business falling short in one of these areas? Learn more about the 5 Cs of credit and how you can make sure your startup is prepared before approaching a lender.
Create A Business Plan
You have your business ideas in your head and maybe even jotted down in a notebook somewhere, but it’s important to have an actual business plan. Not only is this essential for drawing in investors or securing funding, but it also serves as a blueprint for your business. Think of your business plan as a road map, outlining the details of where you’re going (your goal) and how you will get there.
Since every business (and the goals of each business owner) is different, no two business plans are the same. However, there are a few common sections that each business plan shares. These include:
Products & Services
For some businesses, a one-page business plan may be sufficient. For others, however, a more comprehensive plan may be needed, particularly if you’re looking for investors or to obtain a small business loan.
Evaluate The Cost Of Borrowing
It may be tempting to jump on the first funding offer that comes your way, but it’s important to stop and weigh out the cost of funding.
For instance, if you get approved for a startup loan, look at factors such as fees and interest. Calculate how much you’ll pay to borrow funds, and determine if this is feasible or if it could potentially sink your business.
If you have an interested investor that wants equity in exchange for capital, consider how much of your business you have to give up. Are the funds you’ll receive today worth giving up a large portion of your profits in the future? Look at the cost of borrowing over the long-term to determine if you need to find another source of funding.
Don’t Be Afraid To Get Creative
When it comes to starting (and growing) a business, acquiring funding takes some creativity. Maybe you’ll use one (or more) of the methods suggested in this post to fund your startup. Or maybe you’ll do something else entirely. The key is to find what works best for you.
Don’t be afraid to get creative. Tap your friends and family that could be potential investors. Attend industry events and network with like-minded entrepreneurs. Keep an open mind, be flexible, and have a backup plan in place in the event that your
Hold Up Your End Of The Bargain
Once you do get funding, your work doesn’t stop there. Whether you agree to repay a lender each month or you’re using a supplier for recurring purchases, make sure that you always keep your promises (whether they’re on paper or not). Word travels fast among the small business community, and the last thing you want to do is burn your bridges. Repay your debts as agreed, hold up your end of every deal you make, and build a reputation as a business owner with integrity and strong character.
An added bonus? Paying your debts on time helps raise your credit score, making it easier to qualify for additional funding with better terms in the future.
Go Out & Get Funded
Now that you have a better idea of the funding opportunities open to you, it’s time to get out there and find that capital. Remember, it pays to be patient, do your research, and explore all funding options before making the giant leap into owning and operating your own business. Good luck!
The post How To Get Startup Funding: 5 Types Of Funding For Startups & 5 Tips To You Get Started appeared first on Merchant Maverick.
In the midst of the much-bungled Paycheck Protection Program (PPP), one group of financial institutions have stood out: Fintechs.
Fintech — a term that stems from “financial technology” — has played a key role in the years after the 2008 recession by offering small businesses alternative lending platforms to the traditional banking system. During the current time of crisis, many fintechs pivoted quickly to shovel out billions in PPP funds.
Like almost everything else associated with the PPP, fintechs have been far from perfect over the past few months. However, these forward-facing firms have still helped fill a gap left by the bigger banks.
Let’s take a look at how some fintechs leveraged their technology to help small businesses sort out the PPP.
Fintech Lenders Processed Small-Sized Loans
With the PPP receiving $350 billion in round one of funding and then another $310 billion in round two, there should have been enough funds to go around — especially because Congress just extended the program’s deadline from June 30 to August 8.
However, traditional banks appeared to have favored richer clients — the latest numbers from the SBA indicate the average PPP loan sits at $107,000 — leaving many smaller businesses in a lurch.
That’s where fintech has thrived.
Based on data compiled from companies themselves and the SBA, here’s a peek at how some non-traditional financial institutions have fared compared to the average loan size of $107,000:
Square Capital, the funding arm of the well-known payments giant, has averaged a loan size of under $11,000.
While approving the third-most PPP loans of any institution, online lender Kabbage has helped primarily small borrowers: Its average loan size so far is $28,100.
In round one of funding, multi-strategy finance company Ready Capital approved the most PPP applicants by volume as well as the lowest average size among the top 15 lenders at $72,803 per loan.
While not actually a fintech, Cross River Bank is an FDIC member that underwrites a number of loans routed through fintechs (including some loans through the above-mentioned Kabbage). This bank has averaged a loan size of $39,871.
Additionally, The New York Times reported in April that some legacy banks gave special assistance to wealthier clients. According to a JPMorgan insider, their bank’s service was internally dubbed a âconcierge treatment” that enabled clients to avoid online portals while skipping long queues.
With bigger banks privileging richer clients, numerous small businesses across the country have turned to fintech.
“Any exogenous shock to the system favors companies that can move quickly and take advantage of those things,” the co-founder of payroll firm Rippling, Parker Conrad, told The New York Times in June. “All the reticence about doing things online evaporated in an instant. Thatâs a dynamic that impacts not just fintechs but technology companies more broadly who are trying to automate business processes that are offline.”
Even Fintechs Caused Customers Grief
It hasn’t been all sunshine and roses for fintechs, however.
On our site, Merchant Maverick has noticed a particular struggle with Kabbage — which, it should also be noted, shut off credit lines to customers in the early days of COVID-19.
“We have applied for the PPP loan and they are so unorganized and have asked for the same documents at least 15 times please run far far away from this company,” commented one frustrated PPP applicant on our Kabbage review. Another person who claimed to have applied for a PPP loan through Kabbage added: “After a month of sending every document in and sometimes sending them in twice, calling them [every day] and being put on a wait time just to be told they would return my calls and never did.”
Lendio, which Merchant Maverick generally likes for its wide-ranging loan marketplace, has also irked potential borrowers — mainly during the first round of PPP funding.
Some voiced their stories on Reddit about how Lendio’s partner banks, Ready Capital and Customers Bank, were slow to process approved loans. One Redditor in particular wrote: “Ready [Capital] is now asking for more docs in order to deny loans Lendio has already approved. And of course after being held hostage for 19 days, PPP funds are now gone.”
Countless Business Got Funding Through Fintechs
Still, it’s hard to fully disparage the work these firms have done to help small businesses during the economic downturn.
Kabbage, for example, has managed to help an impressive number of businesses despite any flaws with its process. By the end of June, the company doled out 209,000 SBA-approved PPP loans (second only to bigwigs Bank of American and JP Morgan Chase) worth $5.8 billion in total. Kabbage CEO Rob Frohwein had earlier claimed that the company “processed over 40% of the average PPP application volume of the largest three banks in the country.”
The Atlanta-based company also partnered with Uber to create a more streamlined process for the car ride’s independent contractors who have been struggling for work since lockdown started. This partnership was especially unique because it allowed Kabbage to prepopulate loan applications with data shared directly from Uber.
Moving on from Kabbage, Square Capital facilitated over 76,000 small business loans worth $820 million in PPP funding through mid-June. Square Capital especially focused on sole proprietors — its number of loans to non-employer businesses doubled that of employer firms.
Meanwhile, Lendio has helped over 300 financial institutions process 100,000+ PPP loans worth more than $8 billion. The Utah firm has further pledged additional economic support by promising $200,000 in grant money to underserved small business owners.
Otherwise, Nav, which operates a lending marketplace, built a forgiveness calculator and says it helped “tens of thousands of small business owners” in finding the right PPP lender. Direct online lender BlueVine vowed on June 30 to continue receiving PPP applications, even as Congress held the program’s July extension in limbo.
Fintechs that don’t usually offer loans even got into the act. Divvy and Brex, both corporate card companies, used their tech prowess to help small businesses in need. In the cloud-based payroll and human resources sphere, Gusto provided tools to help small businesses compile the paperwork necessary to get PPP funds.
Still Need More Business Aid?
Because Congress extended the PPP deadline to August 8 on July 1, you still have time to apply. Merchant Maverick has written up a basic guide to applying for a PPP loan. The government is also operating Economic Injury Disaster Loans for businesses impacted by COVID-19. To learn how to apply, read our guide to the EIDL application.
If you don’t qualify for federal aid or have already exhausted your funds, you will need to look elsewhere for financial support. We recommend owners take a peek at our list of best PPP/EIDL alternatives.
It’s also worth noting that many state, county, and city governments are currently running their own aid programs. For instance, Tampa, Fla. just handed out $1.2 million in grants to local businesses while the state of Louisiana recently passed a $300 million small business relief package.
If one of those routes fails, you could try a different type of business loan. Merchant Maverick’s step-by-step article on getting a loan may also be helpful in securing cash for your business.
The post How Fintechs Fared: Many Small Businesses Got Much-Needed PPP Funding Via Online Lenders appeared first on Merchant Maverick.
If you’re a small business owner that has been affected by the COVID-19 pandemic, you’ve likely sought resources for funding to help your business through this difficult time. The Coronavirus Aid, Relief, and Economic Stability (CARES) Act may be of interest to business owners like you. This legislation was passed by the US government to help taxpayers and small business owners receive financial relief as businesses have shuttered and workers laid off.
For small business owners, there are quite a few benefits included in the CARES Act. You’ve probably heard of the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) — both funding options for small businesses impacted by the coronavirus. But the CARES Act offers additional opportunities to put money back in your pocket with tax credits.
In addition to the CARES Act, employers affected by the coronavirus can also take advantage of the tax credits available through the Families First Coronavirus Response Act (FFCRA).
Whether you’re looking for an incentive to keep your business fully staffed or you need extra funds to keep your business afloat, these credits may be of interest to you. In this article, we’re going to take a look at two tax credits available for small business owners that have been affected by the coronavirus. We’ll talk about qualifying and calculating tax credits and provide additional information and resources to help your business. Keep reading to take the first step toward financial relief.
The Employee Retention Tax Credit
The CARES Act has provided financial relief with small business loans to help employers cover payroll and other qualified expenses. But an additional financial benefit that shouldn’t be overlooked is the Employee Retention Tax Credit. Keep reading to learn more about how this tax credit can help your business overcome the fallout from the coronavirus.
What Is The Employee Retention Credit?
The Employee Retention Tax Credit (ERTC) is a provision in the CARES Act that provides a tax credit to qualified employers. This credit is an incentive for employers to keep their businesses staffed without laying off or furloughing employees. With this credit, employers can claim 50% of qualified wages paid to their employees. We’ll discuss limitations and how to calculate the amount of the ERTC a little later.
Do I Qualify For The Employee Retention Credit?
To claim the ERTC, you must meet several requirements.
Be An Eligible Employer
To be eligible to claim this credit, you must be an eligible employer as defined by the IRS. To be eligible, one of the following must be true:
The business must have fully or partially suspended operations in 2020 as a result of a government mandate due to COVID-19
The business must have seen a significant decline in revenue for the quarter
In other words, if your business was shut down by a local, state, or federal government because of the coronavirus, you are eligible for this credit. If your business was still in operation but experienced a drop in revenue for the quarter (a decline of 50% or more when compared to the same quarter in 2019), your business is also eligible.
Number Of Employees
The ERTC is available to businesses of all sizes. However, there are some differences in how your credit is calculated based on your business’ number of employees. We will go into more detail on these limitations in the next section.
Private Businesses Or Tax-Exempt Organizations
To receive the ERTC, your business must fall under one of the following categories:
Private sector for-profit business
Tax-exempt organizations that participate in a trade or business (including tribes and tribal entities)
The following businesses are not eligible to receive the ERTC:
Federal, state, and local governments
There are some exceptions, however. For example, while a self-employed individual can’t claim a tax credit for their own earnings, they may be able to do so if they have employees participating in their trade or business that meet all other eligibility requirements.
If you have received a Paycheck Protection Program loan, you are ineligible to receive the ERTC. If you receive the ERTC, you are ineligible to apply for the PPP. You can, however, still claim the ERTC if you received or plan to apply for the Economic Injury Disaster Loan.
How To Calculate The Employee Retention Credit
The ERTC allows you to claim 50% of qualified wages (including qualified health benefits) paid for each eligible employee. These wages must have been paid between March 13, 2020, through December 31, 2020. This credit can be claimed on up to $10,000 in wages per employee. This means that the maximum credit that can be claimed per employee is $5,000.
While there are no limitations on the business that claims the ERTC, there are two different calculations based on the number of employees.
100 Or Fewer Full-Time Employees
If your business has up to 100 full-time employees, wages paid to all qualified full-time employees are eligible to claim under the ERTC.
For example, your business has 10 employees. Each employee was paid wages and/or health benefits of at least $10,000. You can claim 50% of these wages per employee — a credit of $5,000/employee. With 10 employees, you could claim $50,000.
More Than 100 Full-Time Employees
If your business has more than 100 full-time employees, you will calculate your ERTC differently. The ERTC is calculated by using the wages of full-time employees who have not been working as a result of government closures or a significant drop in revenue as a result of the coronavirus.
You can claim 50% of wages for each qualified employee.
As an example, let’s say your business has 110 employees. Your revenues have dropped by more than 50%, and you have to reduce your staff. Thirty employees are not working but are still receiving pay, and each employee is earning $5,000 during this period. You can claim 50% of these qualified wages (or $2,500/employee). For 30 employees, this would be $75,000 in tax credits that your business could claim.
The Families First Coronavirus Response Act
Another tax credit that businesses can claim is under the Families First Coronavirus Response Act. This FFCRA provides a tax credit to eligible employers for paid medical and family leave due to the coronavirus. Keep reading for the breakdown of how this credit works.
What Is The Families First Coronavirus Response Act?
The FFCRA is a tax credit that qualified employers can claim for employees who have taken medical or family leave as a result of COVID-19.
Employees that have been exposed to the coronavirus or are taking care of a family member with the coronavirus put others at risk when they come into work. However, missing a paycheck may not be feasible for the employee. The FFCRA helps employers provide coronavirus-related family and medical leave without putting a financial burden on the business.
Do I Qualify For The FFCRA Credit?
Is the FFCRA credit an option for your business? It may be if you meet the following requirements.
Size Of Business
The FFCRA credit is available to private organizations and select public companies with fewer than 500 employees. This includes both full- and part-time workers.
No Revenue Or Shutdown Requirements
Unlike the ERTC, claiming the FFCRA tax credit does not have shutdown or revenue requirements. If your business is required to provide sick time and family leave to employees, you may be eligible for this credit.
You can apply for and receive the PPP loan and still receive the FFCRA tax credit. However, it should be noted that any sick or family leave wages paid during the eight week PPP funding period are not eligible for loan forgiveness.
Claiming ERTC & FFCRA
Employers can claim both the ERTC and FFCRA tax credits for eligible employees. However, you can not claim both credits for the same employee on the same day.
How To Calculate The Sick & Family Leave Credit
Calculating this tax credit can get a little confusing. So we’ll break down each section to make it easier to understand.
Paid Sick Leave
Employers can receive a credit equal to 100% of wages paid to employees for coronavirus-related sick leave. Employers may receive credits for wages paid for up to 10 days (for a total of 80 hours) per employee. This applies to any employee who has taken sick leave to:
Quarantine or self-quarantine as a result of the coronavirus
Seek medical attention after showing symptoms of the coronavirus
Employers can also receive credit for eligible healthcare plan expenses and the employer’s share of Medicare taxes imposed on paid sick leave wages.
The maximum credit per employee is $511/day and up to $5,110 for the entire sick leave period. To qualify for this credit, wages must be paid between April 1, 2020, and December 31, 2020.
Example: An employee’s regular rate of pay is $200/day. The employee shows possible symptoms of the coronavirus and seeks medical attention. The employee is off for five days before receiving negative test results and is allowed to return to work. The employee was paid for sick leave during this time. The total credit you as the employer may claim is $1,000 plus eligible healthcare expenses and your share of Medicare taxes on these wages.
There are times when an employee is healthy but may have to take family leave. Through the coronavirus pandemic, some reasons that employees take family leave are:
Caring for a family member that has self-quarantined or is following a government-ordered mandate related to the coronavirus
Caring for a child whose school or place of care is closed as a result of the coronavirus
Under the FFCRA, employees receive 1o days (up to 80 hours) of paid family leave. Pay rate is two-thirds of the employee’s rate of pay or minimum wage, whichever is greater. Each employee can be paid up to $200/day or a maximum total of $2,000. Employers can claim 100% of these funds as a tax credit. Employers can also receive credit for eligible health plan expenses and their own portion of Medicare taxes for the period when family leave wages are paid.
In addition to the two weeks mentioned above, families that have been affected by the coronavirus can receive up to 10 additional weeks of paid family leave. Wages are two-thirds of the employee’s regular rate or minimum wage, whichever is greater. Employees may receive up to $200/day or a maximum of $10,000 paid out over ten weeks. Employers can receive a credit for 100% of these wages, plus credits for eligible health plan expenses and Medicare taxes.
To summarize, workers can receive up to 10 days of sick leave or up to 12 weeks for family leave. All wages paid can be claimed as a tax credit by the employer. Let’s take a look at an example.
Your employee has been exposed to the coronavirus and is self-isolating while getting tested. The employee’s regular rate of pay is $180/day. The employee uses the full 10 days of sick leave and receives payment of $1,800 (100% of their regular wages).
During this time, the employee tested negative for the coronavirus. However, their regular childcare provider is not working due to a shutdown, and the employee has no other childcare options. The employee has to care for their child while seeking out alternative childcare. The employee uses three weeks of family leave for this purpose. The employee is paid at two-thirds of their regular rate ($120/day) for three weeks for a total of $2,700.
Now, add the total wages from sick leave ($1,800) and the total from family leave ($2,700). The total wages paid to this employee were $4,500 — 100% of which you can claim as a tax credit.
How To Get Your Tax Credits
Hopefully, you now have an understanding of these two major tax credits and how they are calculated. The next step, then, is to figure out how to get these credits. Let’s explore this process step-by-step.
Before you claim your tax credits, make sure that you understand the documentation requirements. For every employee that has taken paid family or sick leave, you must have a document that includes:
The legal name of the employee
Dates requested for leave
Reason for leave
An employee statement stating that he or she is unable to work for that reason
If the employee is taking leave as a result of quarantine, self-quarantine, or to care for a quarantined family member, document either:
Name of the government entity that issued the quarantine order OR
The name of the healthcare provider that recommended self-quarantine
If the employee is taking leave as a result of a child not being in school or daycare for coronavirus-related reasons, document:
The legal name of the child
Name of the school or daycare facility
An employee statement stating that there is no other care available for the child
Claiming The Employee Retention Credit
To claim the ERTC, you can reduce the deposits you make toward employment taxes. When filing your quarterly taxes, you will report the eligible wages and associated healthcare plan costs on IRS Form Employer’s Quarterly Federal Tax Return. If the amount of the credit exceeds the amount of required employment tax deposits, this is an overage that will be refunded by the IRS.
If you have run your calculations and will have an overage, you can request an advanced refund by filing IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19.
The IRS offers a number of resources related to calculating and claiming the ERTC, so if you’re still unsure of how to proceed, don’t hesitate to check out these resources.
Claiming The FFCRA Tax Credit
Claiming the FFCRA tax credit is pretty much identical to claiming the ERTC. You can withhold federal employment tax deposits when paid leave begins. Eligible wages, healthcare plan costs, and your share of Medicare taxes can then be reported on your quarterly tax forms.
If there is an overage after federal employment tax deposits have been covered by the tax credit, you will receive a refund of this overage from the IRS. You can also file IRS Form 7200 to request an advance of this overage.
Additional Help & Resources
There are also some great resources available through the IRS and Department of Labor. At Merchant Maverick, we’ve also stayed up-to-date on the latest coronavirus aid and resources for small business owners. This information is compiled in our COVID-19 hub.
Finally, don’t forget that there aren’t just tax credits for businesses affected by the coronavirus. There’s also a number of business tax deductions you could be overlooking, so take a minute to learn more about these money-saving credits. And, of course, if you’re unsure of what credits your business can claim, it’s never a bad idea to consult with an accountant. Good luck!
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