Can I Afford A Small Business Loan?

Can You Afford A Small Business Loan?

“Can I afford a small business loan?”

For many business owners, this is (literally) the $64,000 question!

With so many variables in play, it may seem daunting to calculate whether you can actually cover new loan payments. Luckily, there are multiple financial ratios in place to help you do just that.

In this post, we’ll teach you how to use the debt service coverage ratio and the debt-to-income ratio to determine whether you can afford a loan, what borrowing amount is right for you, what monthly payment you can afford, and if a loan is actually the right choice for your business. (If it turns out, based on these ratios, that you can’t afford a business loan just yet, we’ll also give you six practical tips to better your financial situation.)

Read on to see if your small business is ready for financing.

Is A Small Business Loan Right For Me?

This is the very first question you should ask yourself. Just because you can afford a loan doesn’t mean you should take one out. Before you start seeking funding, take the time to really consider your business’s financial situation.

Ask yourself what problems you would be solving by taking out a business loan and consider whether there is another way to solve those problems.

For example, if you’re looking for start-up funding, have you considered venture capital? Angel investors? Crowdfunding? If you’re having trouble maintaining consistent cash flow, have you carefully analyzed your operating costs or cut back unnecessary business expenses to increase revenue?

Make sure to explore all of your options before jumping the gun on your loan search. Now, that being said, there are plenty of solid reasons to get a business loan:

  • To expand your business
  • To purchase inventory
  • To buy equipment
  • To cover off-season expenses
  • To take on a new, high-potential project
  • To build business credit

When determining whether a small business loan is right for you, carefully meditate on your business’s short-term and long-term goals. If you haven’t already, make a business plan to help you achieve your future goals.

If a loan fits into this plan and benefits your business, great!

Next, we’ll talk about how to know if you can actually afford a loan, how much you can borrow, and what to change if you can’t afford a loan.

What Do Small Business Lenders Look For?

At the most basic level, lenders want to see that:

  1. Your business has enough cash flow to afford monthly payments.
  2. You can make those payments on time.

There are many factors that lenders consider when analyzing a loan application, but some of the most important variables are your credit score, your debt service coverage ratio, your debt-to-income ratio, and your ability to put up collateral.

We’ll cover all of these factors in greater detail below.

Using The Debt Service Coverage Ratio

The debt service coverage ratio is one of the main tools lenders use to determine whether you are eligible for a loan — it’s also one of the most important calculations small business owners can do before taking on new debt.

The debt service coverage ratio (DSCR) measures the relationship between your business’s income and its debt. Lenders use this ratio to gauge the risk of lending to you and to see if you can afford to make payments on a loan, given your business’s cash flow.

How To Calculate The Debt Service Coverage Ratio

Each lender calculates the debt service coverage ratio differently. Some lump the business owners’ personal income in with the net operating income; others don’t. We’ll cover the most common DSCR formula, but be sure to ask your lender how they calculate DSCR for the most accurate ratio.

Most often, your business’s DSCR is calculated by dividing your net operating income by your current year’s debt obligations:

Net Operating Income / Current Year’s Debt Obligations = Debt Service Coverage Ratio

Your net operating income is the total revenue generated by selling services or goods, minus your operating expenses (operating expenses include things like inventory, employee wages, rent, utilities — anything that is directly related to purchasing, creating, or selling your goods and products).

Your current year’s debt obligations comprise the total amount of debt you must repay in the next year, including interest payments and fees.

Let’s look at an example:

A business owner wants to know whether or not they can afford a loan to purchase some new equipment. The business takes in $65,000 in revenue annually but pays $15,000 in operating expenses, resulting in a net operating income of $50,000.

Each month, the business spends $2,000 on its mortgage, $400 on a previous loan, and $100 on a business credit card, making a total monthly debt of $2,500. Since the DSCR calculation requires the current year’s debt, we need to multiply our monthly debt by 12. That gives us a total of $30,000 in debt obligations for the year. Now, let’s plug these numbers into the DSCR formula from earlier.

Net Operating Income / Current Year’s Debt Obligations = Debt Service Coverage Ratio

50,000 / 30,000 = Debt Service Coverage Ratio

50,000 / 30,000 = 1.666667

When you divide 50,000 by 30,000 you get 1.666667. Round this number to the nearest hundredth to get a current debt service coverage ratio of 1.67.

We’ve successfully calculated a debt service coverage ratio! Plug in your business’s information to determine your own DSCR.

What Is The Ideal DSCR?

How do we know what a good DSCR is? What does the DSCR mean in terms of your business?

When it comes to DSCR, the higher the better. Let’s say your DSCR is 1.67, like in our earlier example; that means you have 67% more income than you need to cover your current debts. A DSCR ratio of 1 would indicate that you have exactly enough income to pay your debts but aren’t making any extra profit. If your DSCR is below one, then you have a negative cash flow and can only partially cover your debts.

Obviously, you don’t want a negative cash flow, and breaking even doesn’t quite cut it if you want to take out a loan. So what’s the ideal debt service coverage ratio?

In general, a good debt service coverage ratio is 1.25 or higher. This can vary by lender and by the state of the economy, but overall, a high DSCR suggests that you have enough income to take on another loan and are more likely to qualify for the loan you want.

How Much Can I Borrow?

Not only can your DSCR tell you if you can afford a loan, it can also help you determine the size of the loan you should take out.

Let’s take a look at our earlier example again. We calculated the business’s DSCR at 1.67. This is well above the 1.25 DSCR mark, yes, but it doesn’t necessarily tell you the size of loan the business can afford to borrow.

To figure out the amount the business can safely borrow, we’ll take its annual income and divide it by 1.25:

Net Operating Income / 1.25 = Borrowing Amount

50,000 / 1.25 = 40,000

From the calculation above, we can see that the business can afford to pay up to $40,000 a year on total debt obligations. In our example, the current year’s debt obligations were already $30,000/year. All in all, the business can take on an extra $10,000/year in debt (because $40,000 – $30,000 = $10,000). That amounts to roughly $830/mo.

Plug your own information into the equation so you can determine the ideal borrowing size for your small business loan. This will give you a clear idea of how much you can realistically afford to pay each month before you go and speak to a lender.

To learn more about the debt service coverage ratio, read our post Debt Service Coverage Ratio: How To Calculate And Improve DSCR.

Using The Debt-To-Income Ratio

Lenders also use your personal debt-to-income ratio to evaluate whether or not your business is eligible for a loan. The debt-to-income ratio is used primarily for personal loans (especially mortgages), but this ratio is still important for small businesses, especially sole proprietors.

The debt-to-income (DTI) ratio is a financial tool used to measure the relationship between a person’s debt and income.

Why Is DTI Important?

Your DTI is an important indicator of your trustworthiness. Whereas your credit score shows how likely you are to make your payments on time, your debt-to-income ratio shows lenders if you can afford the monthly payments on a personal loan or mortgage.

But if the debt-to-income ratio is predominantly for personal loans and mortgages, why is it important for small businesses?

For sole proprietors and freelancers seeking funding, this ratio is particularly important. Since sole proprietors aren’t legally considered separate business entities, they don’t have a debt service coverage ratio. Instead, the debt-to-income ratio is the main tool lenders will use to analyze a loan application.

While the debt service coverage ratio is by far a better indicator of small business’s financial state, lenders still look at the business owner’s DTI ratio. Lenders evaluate your DTI to see if you are trustworthy and to ensure that you can personally guarantee your business loan if no other collateral is provided.

When deciding whether your business can afford a small business loan, make sure you also consider if you can afford to personally take on the business loan payments if your business goes under. No one wants to think about the fact that their business may fail or that they might default on a business loan. But this scary reality is one you must consider before accepting a business loan. If you can’t afford to offer up collateral or take on the implications of a personal guarantee, then maybe a business loan isn’t right for you.

How To Calculate The Debt-To-Income Ratio

To calculate your debt-to-income ratio, divide your total recurring monthly debt by your gross monthly income:

Total Monthly Debt / Gross Monthly Income = Debt-To-Income Ratio

Your total monthly debt should include all recurring minimum monthly debt payments, while your gross monthly income should include your total monthly income before taxes.

Let’s do an example:

You’re trying to use your DTI to see if you qualify for a mortgage. You pay $300/mo for your car and $200 on student loans for a total monthly debt of $500. Your monthly gross income is $3,500/mo.

500 / 3,500 = Debt-To-Income Ratio

500 / 3,500 = 0.142857

When you divide 500 by 3,500, you’re left with 0.142857. To turn this decimal into a percentage, simply move the decimal point two places to the right and round to the nearest tenth. This gives you a current debt-to-income ratio of 14%. Easy!

Add your own financial information into the formula to see what your debt-to-income ratio is.

What Is The Ideal DTI Ratio?

Now that you know how to calculate your DTI ratio, what does that percentage mean? How do you know if you have a good DTI ratio or a poor ratio?

Unlike DSCR, when it comes to debt-to-income ratios, the lower the better. A low DTI indicates that you can afford to take on an additional loan and are more likely to get approved for the loan you want. A high DTI ratio means that you may have too much existing debt or too little income to be able to afford monthly payments on a new loan.

Generally, a DTI ratio of 36% or lower is considered a good debt-to-income ratio. Many lenders will finance (up to) 43%, but if your DTI is higher than 43%, you may have a hard time getting approved for a loan.

However, these percentages may vary by lender. Real estate and mortgage lenders are known to stick more closely to these guidelines, while other lenders may be more lenient. So be sure to research your lender’s requirements.

What Monthly Payment Can I Afford?

You can use the debt-to-income ratio to determine how much you can afford to pay each month on a loan.

This calculation is most important for sole proprietors seeking funding and individuals seeking mortgages. However, small businesses should still do this calculation to make sure that they can personally afford to cover the payments on a defaulted loan.

Let’s return to our example from earlier. Remember, you were trying to qualify for a mortgage loan. We calculated your current debt-to-income ratio at 14%.

To maintain a good debt-to-income ratio, you don’t want your total DTI ratio to exceed 36%. That means a potential mortgage can take up 22% of your total debt-to-income ratio (36 – 14 = 22).

In this example, to determine the size of the mortgage loan payment you could afford each month, simply multiply your gross monthly income by 22%. (To convert the percentage to a decimal, move the decimal point two spaces to the left.)

3,500 x .22 = 770

Assuming you still want to stick to a 36% DTI, you can afford to pay $770/mo on your mortgage while continuing to make your other monthly loan payments and covering everyday expenses.

To learn more about DTI, read our complete post: Debt-To-Income Ratio: How To Calculate And Lower DTI.

Consider Your Return On Investment

Finally, when determining whether your business can afford a business loan, you want to make sure the benefits ultimately outweigh the costs.

If you are spending the time, money, and effort on a loan, it’s important to have a good return on investment (ROI). Able Lending puts it this way:

The reasonable expected return on your investment must be greater than the APR.

In other words, a loan is only worthwhile if it ultimately helps your business’s profits exceed the costs of the loan, plus interest and fees. Before you borrow money, make sure you have a clear business plan and know exactly how you intend to use your loan to improve your business.

What If I Can’t Afford A Loan?

If you’ve made it to the end of this post and realized that you can’t afford a loan, don’t worry. It’s not the end of the world. There are plenty of ways to improve your business’s financial position so that you can afford a loan in the future.

1. Increase Revenue

Increasing your income can open the doors to more business opportunities and additional funding. By increasing revenue, you can improve your DSCR, lower your DTI ratio, and boost your chances of qualifying for a loan.

2. Decrease Existing Debt

Another way to increase DSCR and lower DTI is to pay off some existing debt. With old loans out of the way, you can move on and take out new loans to help propel your business forward.

3. Improve Your DSCR

We already mentioned that increasing your revenue and decreasing your existing debt can help improve your DSCR. Another way to improve your debt service coverage ratio is to decrease operating expenses. By cutting back on unnecessary expenses and streamlining your business processes, you’ll have a greater overall net operating income — which means more money that you could apply towards a loan.

4. Lower Your DTI

We also already mentioned that increasing your revenue and lowering your debt improves your debt-to-income ratio as well. For borrowers seeking a mortgage, making a bigger down payment is another good way to lower your DTI and decrease the size of your monthly payments.

5. Improve Your Credit Score

Another major roadblock businesses and individuals run into when seeking funding is a low credit score. Improving your credit score can help unlock better loans and rates. To learn more, read the Ultimate Guide To Improving Your Business Credit Score or our article on 5 Ways To Improve Your Personal Credit Score.

6. Lower Your Borrowing Amount

Maybe you really can afford a loan right now and just need to lower your borrowing amount. You may not be able to afford the $100,000 loan you were hoping for, but can you afford the monthly payments on a $50,000 loan? If you can satisfy your needs with a smaller borrowing amount, you should try to do so; if a smaller amount won’t meet the brief, use the first 5 tips above to improve your financial situation so you can afford the loan you want.

Final Thoughts

When wondering whether you can afford a small business loan, you should ask yourself:

  • Do I have a debt service coverage ratio of 1.25 or higher?
  • Do I have a debt-to-income ratio of 36% or lower?
  • Do I have collateral or can I confidently sign a personal guarantee?
  • Will the loan lead to a good return on investment?

If you’ve answered yes to all of these questions, odds are your business is in a healthy financial spot to take on a new small business loan. Use the debt service coverage ratio and debt-to-income ratio to discover exactly how big of a loan you can afford.

Wondering what type of small business loan you should take out? Not all loans are created equal, and a bank loan will be worlds apart from an atypical online lending product. Traditional term loans, short-term loans, SBA loans, and merchant cash advances all have very different rates, fees, and terms. Make sure you understand the differences between different types of funding before you jump the gun on any loan product. Our small business loan calculators can help.

Looking for good lending options? Our small business loan reviews cover online lenders and major banks that offer various types of loans (bank loans, SBA loan, short-term loans, installment loans, lines of credit and more). If you’re just starting out, you might want to consider taking out a personal loan and using it for your business.

To evaluate multiple low-interest lenders at once, it’s a good idea to use a free loan matchmaking service, often called a “loan aggregator.” Merchant Maverick has partnered with Mirador Finance, a financial technology company, to bring you the Merchant Maverick Community of Lenders. By filling out one application, you can be matched to multiple potential lenders. Check your eligibility below.

Borrower requirements:
• Free loan aggregation service; requirements vary by area and lender.
Check your eligibility
Learn more about the Community of Lenders

If can’t afford a loan yet, you should focus on increasing your ability to afford a loan and your chances of getting approved by a lender. Download our free Beginner’s Guide To Small Business Loans for more information, or consult any one of the following articles:

Debt Service Coverage Ratio: How To Calculate And Improve DSCR

Debt-To-Income Ratio: How To Calculate And Lower DTI

The Ultimate Guide To Improving Your Business Credit Score

5 Ways To Improve Your Personal Credit Score

The post Can I Afford A Small Business Loan? appeared first on Merchant Maverick.

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Debt Service Coverage Ratio: How To Calculate And Improve Your Business’s DSCR

Debt Service Coverage Ratio (DSCR)

Applying for small business loans can be stressful. But it wouldn’t be so bad if you knew exactly what lenders are looking for, right? One of the biggest factors in lending decisions is your debt service coverage ratio (DSCR).

But what is the DSCR and how can you figure out what yours is?

In this post, we’ll cover everything you need to know about the debt service coverage ratio. We’ll teach you what a DSCR is, how to calculate your debt service coverage ratio, what a good DSCR looks like, how to increase your debt service coverage ratio, and more.

What Is The Debt Service Coverage Ratio?

The debt service coverage ratio (DSCR) measures the relationship between your business’s income and its debt. Your business’s DSCR is calculated by dividing your net operating income by your current year’s debt obligations.

The debt service coverage ratio is used by lenders to determine if your business generates enough income to afford a business loan. Lenders also use this number to determine how risky your business is and how likely you are to successfully make your monthly payments for the length of the loan.

Why Is The Debt Service Coverage Ratio Important?

The debt service coverage ratio is important for two reasons:

  1. It shows how healthy your business’s cash flow is.
  2. It plays a factor in how likely your business is to qualify for a loan.

The debt service coverage ratio is a good way to monitor your business’s health and financial success. By calculating your DSCR before you start applying for loans, you can know whether or not your business can actually afford to make payments on a loan.

A high DSCR indicates that your business generates enough income to manage payments on a new loan and still make a profit. A low DSCR indicates that you may have trouble making payments on a loan, or may even have a negative cash flow. If this is the case, you may need to increase your DSCR before taking on more debt.

In this way, knowing your DSCR can help you analyze your business’s current financial state and help you make an informed business decision before applying for a loan.

For lenders, the debt service coverage ratio is important as well. Your DSCR is one of the main indicators lenders look at when evaluating your loan application.

Lenders use the DSCR to see how likely you are to make your monthly loan payments. They also look at how much of an income cushion you have to cover any fluctuations in cash flow while still keeping up with payments. This ratio can also help lenders determine the borrowing amount they can offer you.

Here are some of the benefits of a high DSCR ratio:

  • More likely to qualify for a loan
  • More likely to receive an offer with better terms
  • Increases your chances of lower interest rates and a higher borrowing amount
  • Indicates your business can manage debt while still bringing in income
  • Shows your business has a positive cash flow

Unlike your debt-to-income (DTI) ratio, which is healthiest when it is low, the higher your debt service coverage ratio, the better. It is not uncommon for lenders to ask for your debt service coverage ratio from previous years or for up to three years of projected debt service coverage ratios.

How To Calculate Your Debt Service Coverage Ratio

The debt service coverage ratio differs from the debt-to-income ratio in another significant way — lenders don’t all agree on how the DSCR should be calculated.

Different lenders have different ways of calculating your debt service coverage ratio. Some lump the business owner’s personal income in with the business’s income; others don’t. We’ll teach you the most common way to calculate DSCR, but be sure to check with your potential lender for the most accurate DSCR calculation.

Most often, the debt service coverage ratio is calculated by dividing your business’s net operating income by your current year’s debt obligations:

Net Operating Income / Current Year’s Debt Obligations = Debt Service Coverage Ratio

But what is net operating income and how do you determine your current year’s total debt?

Net Operating Income

Your net operating income is your total revenue or income generated from selling products or services, minus your operating expenses. According to the Houston Chronicle:

Operating expenses are those directly related to acquiring and selling your products and services. Such expenses might include costs to make or buy inventory, wages, utilities, rent, supplies and advertising. Operating expenses exclude interest payments to creditors, income taxes and losses from activities outside your main business.

Net operating income is also sometimes referred to as a business’s EBIT (earnings before interest and taxes). To calculate your net operating income, use accounting reports to find your annual income and average operating expenses.

Note: Some lenders calculate your debt service coverage using your EBITDA (earnings before interest, taxes, depreciation, and amortization) instead of your EBIT.

Current Year’s Debt Obligations 

Your current year’s debt obligations refer to the total amount of debt payments you must repay in the upcoming year.

This includes all of your loan payments, interest payments, loan fees, business credit card payments, and any business lease payments. Tally up your monthly charges and multiply them by 12 to get your total year’s debt.

Examples

Now that you know how to figure your net operating income and total debt, let’s do an example using the DSCR formula from earlier:

Net Operating Income / Current Year’s Debt Obligations = Debt Service Coverage Ratio

Let’s say you’re calculating your debt service coverage ratio to see if you can take on a new small business loan to expand your business.

Say your business earns $65,000 in revenue annually but pays $15,000 in operating expenses. That leaves you with a net operating income of $50,000.

Now, let’s say each month you spend $2,000 on your mortgage, $400 on a previous loan, and $100 on your business credit card. That means you pay $2,500/mo on debt. Since the DSCR calculation requires the current year’s debt, we need to multiply our monthly debt by 12. That gives us a total of $30,000 in debt obligations for the year. Now, let’s plug these numbers in.

50,000 / 30,000 = Debt Service Coverage Ratio

50,000 / 30,000 = 1.666667

When you divide 50,000 by 30,000 you get 1.666667. Round this number to the nearest hundredth to get a current debt service coverage ratio of 1.67.

Now you’ve successfully calculated a debt service coverage ratio! Try plugging your own business’s numbers into the formula. And be sure to remember that this is only one way of calculating your DSCR. While this way is fairly common, be sure to ask your lender how they calculate DSCR for the most accurate ratio.

What Is A Good Debt Service Coverage Ratio?

So now you know how to calculate your DSCR, but you may not know what makes a DSCR good or bad. How can you tell whether your debt service coverage ratio will qualify you to take out a new loan or if it means you’re in trouble?

When it comes to DSCR, the higher the ratio the better. Let’s say your DSCR is 1.67, like in our earlier example; that means you have 67% more income than you need to cover your current debts. If you have a DSCR ratio of 1, that means you have exactly enough income to pay your debts but aren’t making any extra profit. If your DSCR is below one, then you have a negative cash flow and can only partially cover your debts.

Obviously, you don’t want a negative cash flow, and breaking even doesn’t quite cut the mustard if you want to take out a loan. So what’s the ideal debt service coverage ratio that lenders look for?

In general, a good debt service coverage ratio is 1.25. Anything higher is an optimal DSCR. Lenders want to see that you can easily pay your debts while still generating enough income to cover any cash flow fluctuations. However, each lender has their own required debt service coverage ratio. Additionally, accepted debt service coverage ratios can vary depending on the economy. According to Fundera contributor, Rieva Lesonsky:

In general, lenders are looking for debt-service coverage ratios of 1.25 or more. In some cases — when the economy is doing great — they might accept a ratio as low as 1.15, but in others — when the economy is tight — they may require a ratio of 1.35 or even 1.5.

FitSmallBusiness writer, Priyanka Prakash, notes that multiple aspects of your loan application can affect whether you are approved as well, not just your DSCR. Prakash says:

Your lender may be willing to overlook a slightly lower DSCR if other aspects of your application, such as business revenue and credit score, are very strong.

Be sure to carefully research each lender’s application process and qualification requirements before applying for a loan. Again, make sure you know how that specific lender calculates DSCR. This is important both for before you apply and after you are accepted as many lenders require you to maintain a certain DSCR throughout the length of your loan.

Most lenders will reevaluate your DSCR each year, but you may want to check your debt service coverage ratio even more often to make sure you’re on track to meet your lender’s requirements. If you don’t meet their DSCR requirements, they may say you’re in violation of your loan agreement and expect you to pay the loan in full within a short time period.

To be safe, it’s always best to know exactly what your lender’s policies are and try to keep your DSCR as high as possible.

Using DSCR To Determine Whether You Can Afford A Loan

Not only can you use your DSCR to check your business’s financial health and ability to pay its debt, you can also use it to determine if you can afford a loan and how big of a loan you should take out.

Let’s return to our example from earlier. Your business is trying to decide if it can afford to take out a business expansion loan. We calculated your current DSCR at 1.67, which means you have an extra 67% of income after you’ve paid your debts. This is well above the 1.25 DSCR mark, but it doesn’t necessarily indicate the size of the loan you can reasonably afford to borrow.

Take your annual income and divide it by 1.25 to figure out how much you can afford to pay back each year:

Net Operating Income / 1.25 = Borrowing Amount

50,000 / 1.25 = 40,000

In our example, your current year’s debt obligations were $30,000/year. From the calculation above, we can see that you can afford to pay up to $40,000 a year on your debt obligations. So, you can take on an extra $10,000/year in debt (because $40,000 – $30,000 = $10,000). That amounts to roughly $830/mo.

If you approach a potential lender knowing exactly how much you can afford to pay each month, you can avoid being pressured into borrowing more than you can afford.

If you aren’t comfortable with a 1.25 DSCR and would rather have a little more wiggle room, that’s totally fine. Don’t ever borrow more than you are comfortable with. The good thing is, you can use the debt service coverage ratio to see exactly how much you can safely borrow while maintaining your desired DSCR. Simply replace “1.25” in the formula above with your desired ratio to figure the payments you can afford.

How To Improve Your Debt Service Coverage Ratio

To increase your chances of getting a loan — or to maintain payments on your existing loan — you may need to improve your DSCR. Here are a few ways to increase your debt service coverage ratio:

  • Increase your net operating income
  • Decrease your operating expenses
  • Pay off some of your existing debt
  • Decrease your borrowing amount

To increase your net operating income, consider various ways to increase your revenue. Maybe offer additional services or goods or raise your prices. Try a new marketing strategy that brings in additional buyers or offer an extra incentive to existing buyers to make them purchase more goods.

Increasing sales isn’t the only way to increase your net operating income. A huge portion of your net operating income comes down to operating expenses. Cut back unnecessary expenses. Find ways to streamline your work processes and make employees more productive during work hours. Ask your existing vendors about discounts for buying in bulk. Maybe even consider eliminating products that don’t sell well or are too time-consuming and expensive to make.

Besides increasing your net operating income, a good way to lower your debt service coverage ratio is to lower your existing debt. Carefully evaluate your budget. Cut unnecessary expenses and allocate that money to paying down your debt instead. You can pay off your debt quickly using various methods like the debt snowball method or the debt avalanche method. Depending on your financial situation, consolidating your business debt might also be a good option.

Final Thoughts

For small business searching for funding, the debt service coverage ratio plays a huge factor in lending decisions. Lenders use your DSCR to determine whether you can afford to make regular loan payments and how much you can borrow.

But more than that, your debt service ratio is also a great tool for understanding your business’s financial health and cash flow. Your DSCR can show you both how much income your company has after debt payments and whether it’s financially wise to take out a loan. The higher your DSCR, the better.

As always, we recommend carefully evaluating your financial situation before seeking a loan. Calculate your DSCR, see if you can afford to take on a loan, and know exactly how you are going to use that loan before you borrow. With debt service coverage ratios, it’s more important than ever to carefully research your lender’s requirements as each has their own way of calculating the DSCR. And don’t forget to confirm whether your lender requires you to maintain a specific DSCR for the length of the loan.

Looking for good lending options? Our small business loan reviews cover both online lenders and major banks. To evaluate multiple low-interest lenders at once, it’s a good idea to use a free loan matchmaking service, often called a “loan aggregator.”

Merchant Maverick has partnered with Mirador Finance, a financial technology company, to bring you the Merchant Maverick Community of Lenders. By filling out one application, you can be matched to multiple potential lenders. Check your eligibility below.

Borrower requirements:
• Free loan aggregation service; requirements vary by area and lender.
Check your eligibility
Learn more about the Community of Lenders

The post Debt Service Coverage Ratio: How To Calculate And Improve Your Business’s DSCR appeared first on Merchant Maverick.

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Debt-To-Income Ratio: How To Calculate And Lower Your DTI

Debt-To-Income Ratio: How To Calculate and Improve DTI

When applying for loans, we often worry most about our credit scores. Many people don’t realize that there’s another factor that lenders consider: your debt-to-income (DTI) ratio.

But what is the debt-to-income ratio, and why does it matter?

In this post, we’ll cover everything you need to know about the debt-to-income ratio. We’ll teach you what a DTI ratio is, how to calculate your debt-to-income ratio, what a good DTI ratio looks like, how to lower your DTI, and more.

What Is The Debt-To-Income Ratio?

The debt-to income (DTI) ratio is a financial tool used to measure the relationship between a person’s debt and income. The DTI ratio is calculated by dividing recurring monthly debt payments by gross monthly income.

When applying for a loan, lenders look at your DTI to see if you can afford regular monthly payments based on your income and to determine how much of a risk you are.

The debt-to-income ratio is primarily used when applying for personal mortgages (though some other personal loans depend on your DTI as well). For small businesses applying for loans, greater value is placed on your debt service coverage ratio (DSCR).

However, the debt-to-income ratio is still important for sole proprietors and freelancers in need of financing. Sole proprietors aren’t legally considered separate business entities and therefore don’t have a DSCR — this means lenders will look at your debt-to-income ratio when considering your loan application.

Why The Debt-To-Income Ratio Is Important

Your debt-to-income ratio is important for two reasons:

  1. It indicates how financially healthy you are.
  2. It plays a large factor in how likely you are to qualify for a loan.

Before applying for a loan, it’s important to consider whether you can actually afford one. By calculating your DTI ratio, you can analyze how much existing debt you have and whether or not it’s financially wise to take on more debt considering your monthly income. In addition, figuring out your DTI ratio will help you determine how much debt you can realistically take on.

If you calculate your DTI and see that there’s room to wisely take on more debt to purchase property or expand your business, awesome. If you have too much debt or too little income, taking on more debt might not be the right option — at least not until you lower your DTI. Knowing your DTI ratio before you even start talking to potential lenders will save you a whole lot of trouble.

For lenders, your DTI is important as well. Whereas a credit score shows how likely you are to make payments, your debt-to-income ratio shows lenders that you can afford to make monthly payments on a potential loan.

If your debt-to-income ratio is too high, lenders may reject your loan application because you’re too high of a risk. If your DTI is low, lenders are more likely to approve your loan because they trust that you will be able to pay back your debt.

Here are some of the key benefits of a low debt-to-income ratio:

  • More likely to qualify for a loan
  • More likely to receive an offer with better loan terms
  • Increases your chances for lower interest rates and higher loan amounts
  • Can potentially afford to take out multiple loans
  • Less stress and worry about if you can make your monthly payments

For small businesses, your personal DTI also has a role to play. While most predominantly look at a small business’s debt service coverage ratio (DSCR), many lenders also evaluate a business owner’s DTI, both to affirm your trustworthiness and to ensure that you can personally guarantee your business loan if no other collateral is provided.

The bottom line? The DTI is incredibly important for individuals and business owners alike.

How To Calculate Your Debt-To-Income Ratio

To calculate your debt-to-income ratio, you’ll need to divide your total recurring monthly debt payments by your gross monthly income. The DTI is always expressed as a percentage. This is the DTI ratio formula:

Total Monthly Debt / Gross Monthly Income = Debt-To-Income Ratio

But how do you determine your total monthly debt and gross monthly income?

Total Monthly Debt

Your total monthly debt includes all of your recurring monthly debt payments, such as mortgage payments, car payments, student loans, credit card balances, etc.

To tally your total monthly debt, add up all of the minimum payments on your monthly debt. For example, if you pay $100/mo on your credit card, but only have to pay a minimum of $25/mo, use $25 when adding your total recurring monthly debt.

Gross Monthly Income

Your gross monthly income is your total monthly income before taxes. You can calculate this a few ways. If you get paid on salary, use this formula to determine your gross income per month.

Gross Monthly Income = Annual Salary / 12

If you get paid hourly, first multiply your hourly wage by the average number of hours you work each week. Then multiply that number by 52 to get your annual gross income. Divide that number by 12 to get your monthly gross income.

Be sure to include all forms of monthly income in your gross monthly income calculation.

Examples

Now that you know how to figure your total monthly debt and your gross monthly income, let’s do an example using the DTI formula from earlier:

Total Monthly Debt / Gross Monthly Income = Debt-To-Income Ratio

Let’s say you’re trying to use your DTI to see if you qualify for a mortgage. You pay $300/mo for your car and $200 on student loans for a total monthly debt of $500.  Your monthly gross income is $3,500/mo.

500 / 3,500 = Debt-To-Income Ratio

500 / 3,500 = 0.142857

When you divide 500 by 3,500, you’re left with 0.142857. To turn this decimal into a percentage, simply move the decimal point two places to the right and round to the nearest tenth. This gives you a current debt-to-income ratio of 14%.

Now, we’ve successfully figured a DTI ratio! Try putting your own financial information into the formula.

What Is A Good Debt-To-Income Ratio?

You now know how to calculate your DTI ratio, but how do you know what the DTI ratio means? Is your DTI good or bad?

When it comes to DTI ratios, the lower the better. A low DTI indicates that you can comfortably take on a loan and make your monthly payments, which means you are more likely to be approved by lenders.

A higher DTI indicates that you may struggle to cover monthly payments, making it more difficult to qualify for loans.

While accepted debt-to-income ratios vary by lender, generally a DTI of 36% or lower is considered a good debt-to-income ratio. Many lenders will finance (up to) a 43% DTI. If your DTI is higher than 43%, you may have a hard time getting approved for a loan. You should consider lowering your DTI before applying.

Again, this will vary by lender. According to Lending Tree:

While the mortgage industry has specific guidelines that most lenders will adhere to, other types of loans are less regulated and largely leave the decision in the hands of the lender.

Mortgage lenders often stick to the 28/36 rule (they’ll lend you a loan so long as your DTI is below 36% with no more than 28% going toward the mortgage). Other types of loans may not be so dependant on these numbers. Some lenders may grant funding to people with a DTI of 43% or higher, albeit with less favorable terms and rates. It all depends on the lender and the type of loan you’re applying for.

For this reason, it’s important to research each lender’s specific qualifications and strive to keep your DTI as low as possible. This will both increase the likelihood of getting approved for a loan and give you peace of mind about your financial health.

Using DTI To Determine If You Can Afford A Loan

Not only does your DTI tell you if you can afford a loan, it also helps determine how big of a loan you should take out.

For example, let’s return to our example from earlier. Remember, you were trying to qualify for a mortgage loan. We calculated your current debt-to-income ratio at 14%.

If you want to keep a good debt-to-income ratio, you don’t want your total DTI ratio to exceed 36%. That means a potential mortgage can take up 22% of our total debt-to-income ratio (36 – 14 = 22).

We can now use this number to determine the size of the mortgage loan payment you could afford each month. Simply multiply your total gross income by 22%. (To convert the percentage into a decimal, move the decimal point two spaces to the left.)

3,500 x .22 = 770

If you want to stick to a 36% DTI, you can afford to pay $770/mo on your mortgage while still making your other monthly loan payments and covering everyday expenses.

If you approach a potential lender knowing exactly how much you can afford to pay each month, you can avoid being heckled into borrowing more than you can afford.

How To Lower Your Debt-To-Income Ratio

By now, the importance of a low debt-to-income ratio has sunk in. The real question becomes: how can you lower your DTI? There are several ways to lower your debt-to-income ratio:

  • Increase your monthly income
  • Pay off some of your debt
  • Decrease your borrowing amount

Increasing your income is a good way to lower your debt-to-income ratio, though this option doesn’t always seem achievable. Consider asking for a raise or starting a side hustle to bring in more additional income.

Decreasing your debt is another viable option. Carefully evaluate your budget. Cut unnecessary expenses and allocate that money to paying down your debt instead. You can pay off your debt quickly using various methods like the debt snowball method or the debt avalanche method. Depending on your financial situation, consolidating your debt might also be a good option.

If you’re applying for a mortgage loan, you can also make a larger down payment, which will lower your monthly payments and, in effect, lower your DTI.

Final Thoughts

The debt-to-income ratio is important for individuals, sole proprietors, and small businesses alike. Your DTI ratio is a big decision-maker for lenders. But more than that, calculating your DTI can help you analyze your financial health, determine whether taking on more debt is right for you, and help you pinpoint how much you can afford to borrow.

As always, we recommend carefully evaluating your financial situation before seeking financing. Evaluate your DTI, consider where you want to be financially, and know exactly how you would use a loan ahead of time. Once you’ve done this, evaluate all of your lending options before making a decision, so that you can get the best terms and rates. Merchant Maverick’s small business loan calculators can be a great resource when you start looking at individual loan products.

Looking for good lending options? Our small business loan reviews cover both online lenders and major banks. We’ve also reviewed lines of credit and MCAs, though you should think long and hard before taking out a merchant cash advance. If you’re just starting out, you might want to consider taking out a personal loan and using it for your business.

The post Debt-To-Income Ratio: How To Calculate And Lower Your DTI appeared first on Merchant Maverick.

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Loans For Freelance Businesses: Your 13 Best Options

loans for freelancers

Freelancer. The very word evokes freedom (and lances). If you’re a self-employed freelancer, I’m sure I don’t have to lecture you about the perks and drawbacks of running a freelance business. You probably enjoy the independence — the feeling of freedom that comes from choosing your own work assignments and making your own financial choices without a boss looking over your shoulder.

However, you’re probably less than thrilled with the difficulty of getting a small business loan. It’s not easy for any business to qualify for a loan from a big bank these days, but it’s all the more difficult for a freelance business. Most banks see sole proprietors as a lending risk, as you are personally liable for all losses and debts your freelance business incurs. Plus, your entire business is dependent on your good health and ability to work.

For these and other reasons, many freelancers would benefit from exploring alternate means of financing. Thankfully, many different types of financing are available from online lenders. When compared with the big banks, online lenders tend to be somewhat more relaxed in their eligibility requirements. But while you may face fewer hurdles regarding your credit score, annual revenue, and time in business, online lenders usually charge higher interest rates than bank loans. That’s the trade-off you accept in exchange for the convenience and less stringent eligibility barriers of online lenders.

Let’s explore the main categories of financing available to freelance businesses and the top reputable lenders that offer loans within each category. Note that many online lenders offer more than one type of loan, so if I list a lender under a particular loan category, that doesn’t mean they don’t offer other loan products!

Personal Loans

Freelancers will find it difficult to get a business loan, whether from a bank or an online lender. In fact, this goes for most young businesses, freelance or not. Lenders of business loans closely examine your business’s revenue, net income, debt-to-asset ratio, business credit, and collateral, and only the most profitable and well-established businesses tend to qualify.

Personal loans are different. With a personal loan, the lender assesses your credit-worthiness, not that of your freelance business, though you will have to disclose the fact that the loan will go towards supporting your freelance business. However, whether or not you qualify for a personal loan will mainly depend on your personal credit score, credit history, source of income, and debt-to-income ratio. Borrowing amounts are also less than with business loans. Typically, the maximum borrowing amount for personal loans is $35K to $50K.

I’m going to walk you through some of the top online vendors of personal loans. But first, here are some links to articles we’ve done on using personal loans for business expenses.

  • The Merchant’s Guide To Personal Loans For Business
  • Top Personal Loans For Business Compared

Upstart

Borrower requirements:
• Must have a personal credit score of 620 or higher.
• No time in business or revenue requirements.
Visit the Upstart website
Read our Upstart review

Upstart is a great personal lender for the freelancer whose credit might not be stellar. In contrast to the personal lenders who scrutinize your credit score/history and finances to the exclusion of all else, Upstart takes a broader view of your earning potential by considering factors such as your employment history and education. You’ll likely still need decent credit to qualify — your credit score must be 620 or higher — but it’s good to see a lender whose conception of credit-worthiness isn’t quite so exclusionary.

You can borrow a maximum of $50K (in most states) from Upstart — more than with many competitors. As far as Upstart’s terms and fees go, the APR ranges from 7.73% to 29.99%, term lengths are for three or five years, and there’s an origination fee of up to 8%.

Overall, Upstart is a top-rated personal lender with a relatively progressive lending ethos. Check out our full Upstart review and Upstart’s website using the links above.

Lending Club

lending club logo
Borrower requirements:
• Must have a personal credit score of 600 or higher.
• No time in business or revenue requirements.
Visit the Lending Club website
Read our Lending Club review

Founded in 2006, Lending Club was one of the first non-bank online lenders to come upon the scene. They remain one of the most popular online lenders out there, as their rates are competitive and their loans are relatively easy to qualify for. What’s not to like?

For personal loans, Lending Club’s maximum borrowing amount is $40K. The APR ranges from 5.98% to 35.89%, term lengths are for three or five years, and there is an origination fee of 1-6%.

Lending Club has lent money to countless people in its decade-plus in business. To learn more about Lending Club, links to the company’s website and our Lending Club review are posted above.

Prosper

Borrower requirements:
• Must have a personal credit score of 640 or above.
• No time in business or revenue requirements.
Visit the Prosper website
Read our Prosper review

Another pioneer in the online lending industry is Prosper, founded in 2005. As with the previous lenders listed, Prosper offers personal loans you can put towards your freelance business.

Prosper offers fixed-term loans with lengths of three or five years. The company’s APRs range from 5.99% to 35.99%, which includes a closing fee of 0.5% to 4.95%, and the maximum borrowing amount is $35K. You will need a credit score of at least 640, however.

Check out our Prosper review at the link above if you’re intrigued. Afterward, visit Prosper’s website and see what kind of rates you can get compared to the other personal lenders I’ve mentioned.

SoFi

sofi logo
Borrower requirements:
• Must have a personal credit score of 660 or above.
• No time in business or revenue requirements.
Visit the SoFi website
Read our SoFi review

SoFi describes itself as “a new kind of finance company.” Short for “social finance,” SoFi offers free career coaching and financial advising to all members. SoFi’s loans are quite flexible in comparison to the other personal lenders listed here.

SoFi’s maximum borrowing amount of $100K is remarkably high for a personal loan vendor, and term lengths run from three, five, or even seven years. With fixed APRs from 5.49% to 13.49% and no origination fees, SoFi’s flexible personal loans are quite competitively priced indeed. On the other hand, SoFi’s borrower requirements are a bit more stringent than those of the other personal lenders listed here, plus the loans are slower in coming — after you’re approved, it can take up to 30 days for you to get your funds.

Visit the above links to read our SoFi review and check out their website to see what they can offer you. Remember, with lenders, as with life, it pays to comparison shop!

Lines Of Credit

Many online lenders include lines of credit as part of their product offerings. If you own a credit card, you’ll understand the concept of a line of credit loan. You’ll get access to a certain amount of funds, and you can draw upon these funds at any time while paying interest only on what you actually borrow.

Lines of credit actually tend to be less expensive than credit cards. Moreover, the repayment terms usually differ.

I’m going to list some lenders offering business lines of credit, but first, here’s further information about this common loan type.

  • The Merchant’s Guide To Line Of Credit Loans

StreetShares

Borrower requirements:
• Must be in business at least 12 months with a revenue of $25,000 per year (sometimes StreetShares will make exceptions for high-earning businesses at least 6 months old).
• Must have a personal credit score of 620 or above.
Visit the StreetShares website
Read our StreetShares review

StreetShares is an online lender offering lines of credit along with traditional installment loans and contract financing. While StreetShares was founded by veterans and takes pride in catering to the particular needs of veteran-owned business, any business owner can use StreetShares to take out a loan — including freelancers!

Take note of the requirements listed above, as there are revenue/time-in-business requirements to be met. As for the lines of credit themselves, the maximum amount you can borrow is $100K, but the amount of the line of credit you can actually get will depend on your revenue. The more you earn, the more you can borrow. All things considered, StreetShares’s borrower requirements for a business line of credit are not terribly onerous.

The draw term length for a StreetShares line of credit is 3 to 36 months, the APR range is 7% – 39.99%, and there is a draw fee of 2.95% each time you draw from your line.

BlueVine

bluevine logo
Line of credit borrower requirements:
• Must be in business at least 6 months with a revenue of $10,000 per month.
• Must have a personal credit score of 600 or above.
• Lines of credit are not available in all states. See full review for details.
Visit the BlueVine website
Read our BlueVine review

Founded in 2013, BlueVine is an online lender that offers both business lines of credit and invoice factoring (more on that later). Let’s examine their lines of credit.

While the amount you can borrow will depend on your revenue, BlueVine’s maximum borrowing amount is $200K. Term lengths are for 6 or 12 months. APRs range from 15% to 78%, and there is a draw fee of 1.5%.

Along with the borrower requirements listed above, note that BlueVine lines of credit are not available in all 50 states.

Invoice Factoring

Invoice factoring is a way for B2B businesses to maintain a consistent cash flow by selling their invoices, at a discount, to factoring companies in exchange for cash upfront. It’s a way to even out your cash flow when you have clients who take their sweet time paying their invoices.

Invoice factoring has some complexities to it, so if you’re thinking it makes sense for your freelance business, I highly recommend reading our explainer article on the subject.

  • A Basic Introduction To Invoice Factoring

Fundbox

Invoice financing borrower requirements:
• No specific time in business, revenue, or credit score requirements.
Visit the Fundbox website
Read our Fundbox review

Founded in 2013, FundBox offers an invoice financing product called FundBox Credit. Invoice financing is very similar to invoice factoring — the difference to the borrower is that you must make payments on your loan on a weekly basis, not whenever your customer pays their invoice.

Fundbox Credit will hold great appeal to many freelancers due to its relaxed eligibility requirements — you don’t have to meet any time in business, revenue, or credit score threshold! However, you are required to have been using compatible accounting or invoicing software for at least three months, or a compatible bank account for at least six. See our Fundbox review for details.

Fundbox Credit lines are offered up to $100K, the term lengths are 12 or 24 weeks, and there is an advance fee of 0.4% to 0.7% per week when you make your weekly payments.

Riviera Finance

Invoice factoring borrower requirements:
• No specific time in business, revenue, or credit score requirements.
• Best for B2B and B2G businesses.
Visit the Riviera Finance website
Read our Riviera Finance review

Founded all the way back in 1969, Riviera Finance is no newcomer when it comes to invoice factoring. Riviera Finance offers non-recourse factoring, which means you won’t have to repurchase an invoice if a customer goes bankrupt.

While Riviera Finance is a real-world meatspace lender with 20 offices throughout the U.S. and Canada, you can nonetheless apply online to use their services.

Riviera Finance offers contracts that run anywhere from month-to-month to 12 months long, and the credit faculty size runs from $5K a month to a whopping $2 million per month! Check out the links above to learn more about Riviera Finance.

P2P Loans

P2P (peer-to-peer) lending is a lending model employed by many online lenders. Instead of borrowing from a central banking entity, your loan application is instead approved by a banking platform to go live for online bidding, where everyday investors who like the cut of your business’s jib can invest in your business.

Small-time investors can be risk-averse, so freelance businesses with bad credit may have difficulty securing the needed financing. Nonetheless, you’re still more likely to be approved for a P2P loan than a bank loan.

Many online lenders of personal loans and other kinds of loans are P2P lenders. In fact, of the lenders I’ve mentioned thus far, Upstart, Lending Club, Prosper, and StreetShares are all P2P lenders!

Microloans

Microloans are small loans — under $35K but typically in the range of $5K to $10K — offered at low interest rates. Microlenders typically focus on marginalized groups that face difficulties getting a loan elsewhere. As such, they are a solid option for women and minority freelancers seeking smaller loans, though any freelancer can take advantage of the generous terms offered by microlenders.

Kiva U.S.

kiva logo
Borrower requirements:
• No specific time in business, revenue, or credit score requirements.
Visit the Kiva U.S. website
Read our Kiva U.S. review

Kiva U.S. is a remarkable microlender in that not only are there no revenue, credit score, or time-in-business requirements to meet in order to qualify, but Kiva U.S. loans carry no interest or fees whatsoever! Pretty cool, eh?

With Kiva U.S., the only requirement to get a loan is that you run a business and that you put your funding towards your business. You can take out a Kiva U.S. loan for as much as $10K or as little as $25. Yes, that’s 25 dollars. Your APR will be a big fat 0%. Term lengths are for 6 to 36 months.

Does this sound too good to be true? Well, keep in mind that Kiva’s application process is significantly longer than that of other online lenders. The process can take up to two months. For more information, check out our Kiva U.S. review and Kiva U.S.’s website at the links above.

Accion

Borrower requirements:
• Requirements vary based on location — see full review for details.
Visit the Accion website
Read our Accion review

Accion is a nonprofit microlender that also happens to be one of our highest-rated lenders, period. Their reputation, customer service, and financial education programs are all top-notch. While Accion’s loans aren’t “free” like those of Kiva U.S., Accion is an excellent funding option for the freelance business owner.

Borrower requirements vary by location, so you’ll need to visit Accion’s site at the link above to see just what is required of you to get an Accion loan. Credit score requirements vary from 550 to 575, and you must demonstrate that you have sufficient cash flow to repay the loan.

While Accion’s loan offerings vary by U.S. state, you can borrow as little as $300 to as much as $1 million (and yes, it would be a stretch to call that a microloan!). APRs generally range from 7% to 34%, and you may need to put up specific collateral in some situations. Check out our full Accion review above for more details, then head to Accion’s website to see what specific offerings are available in your area.

Crowdfunding

Crowdfunding is an excellent way for freelancers in the creative industries to get funded by those who enjoy their work. Note that while P2P lending is sometimes referred to as debt crowdfunding, the kind of crowdfunding I’m talking about is rewards crowdfunding in which backers support you financially and get exclusive access to your work in return. It’s not technically lending, as you don’t have to pay back your backers!

Of course, running a crowdfunding campaign will require much more of your time and energy than a loan application, so know what you’re getting into. Below is a basic primer on running a crowdfunding campaign. (Note that I mention debt and equity crowdfunding in that article — I’m not focusing on those here.)

  • Crowdfunding For Startups: 8 Tips You Should Know Before Launching

Kickstarter

Campaign requirements:
• Must offer rewards to your backers.
Visit the Kickstarter website
Read our Kickstarter review

Founded in 2009, Kickstarter has become synonymous with crowdfunding. With over $3.6 billion in funding sent to creators and entrepreneurs, Kickstarter is the largest commercially-focused crowdfunding site in existence. If your freelance business is devoted to making creative works, Kickstarter is a great way to raise money for a big project.

Kickstarter requires all crowdfunding campaigns to create something that can be shared with others. There’s no limit to the amount of money you can raise on the platform. Your funding campaign can last for up to 60 days (though Kickstarter recommends 30-day campaigns), and Kickstarter will take 5% of what you raise as a platform fee. An additional 3% + $0.20 per pledge goes to the payment processor.

One thing to keep in mind with Kickstarter is that in order to collect the funds at the end of your campaign period, you must reach or surpass your funding goal. Fail to reach your funding goal, and you get nothing — no soup for you.

Check out our Kickstarter review at the link above if you’re interested, then cruise on over to Kickstarter’s website.

Indiegogo

indiegogo
Campaign requirements:
• Offering rewards to your backers is strongly recommended.
Visit the Indiegogo website
Read our Indiegogo review

Indiegogo is a crowdfunding platform that caters to a similar audience as Kickstarter — creative and tech projects and the backers who love them. Initially founded as a funding engine for independent films, Indiegogo soon expanded their mission, offering crowdfunding for a wide variety of commercial purposes. However, Indiegogo differs from Kickstarter in a few key ways.

While Kickstarter pre-screens campaigns for suitability before letting them campaign, Indiegogo serves all comers — just sign up and get started (though this doesn’t mean there are no rules to abide by). Another difference is that you’re not actually required to offer rewards to your backers. However, as you can imagine, you’re probably not going to raise much money if you offer people nothing, so I don’t recommend doing that!

Another difference with Kickstarter is that when you run an Indiegogo campaign, you can choose to employ the keep-what-you-raise crowdfunding model in which you keep whatever you raise at the conclusion of your campaign regardless of whether you’ve met your funding goal. Indiegogo is more flexible in its terms than Kickstarter.

Fees are largely the same as those of Kickstarter — there’s a 5% platform fee and a 3-5% per pledge payment processing fee. Check out the links above if you’re interested in Indiegogo’s crowdfunding model.

Patreon

patreon
Campaign requirements:
• Must offer rewards to your backers.
• Funding is ongoing on a per-month or per-creation basis.
Visit the Patreon website
Read our Patreon review

Patreon differs fundamentally from Kickstarter and Indiegogo. Instead of campaigning for a fixed period of time for a single project, Patreon lets you crowdfund on an ongoing basis. You can just keep creating on your own time schedule. Your patrons (assuming you attract some!) sign up to support you either on a monthly or per-creation basis. It’s a great way for freelancers to monetize their creative output indefinitely, not just for one specific project.

Patreon is generally more relaxed in the sort of campaigns it allows than Kickstarter or Indiegogo — you can probably get away with producing “edgier” content than with the other two. As for fees, Patreon takes 5% off the top, with payment processing fees coming to approximately 5% as well.

Final Thoughts

Life’s not easy for the freelancer. With all the other challenges you face, securing the funding you need can seem like an insurmountable hurdle. Thankfully, there are many viable funding options out there for the freelance business owner determined to make it work.

Be sure to explore multiple options in your funding quest so you can weigh each option on its relative merits. Now go forth and let your freelance flag fly!

The post Loans For Freelance Businesses: Your 13 Best Options appeared first on Merchant Maverick.

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How To Use GoFundMe To Fund A Business In 8 Steps

go fund me for business start up

With over $5 billion raised on the platform since its inception in 2010, GoFundMe has a reputation for helping to cover the costs of personal emergencies in a world where most of us are just one missed paycheck away from ruin. But while the company has become synonymous with charitable crowdfunding, you might not realize that GoFundMe can be used to fund a business as well. Want proof? Here are the categories you can choose from when creating your GoFundMe campaign:

 

go fund me for business

Now, don’t get me wrong: If your entrepreneurial venture is a high-tech startup with exponential growth potential, or if you’re creating the next tabletop gaming sensation, you’re going to be better off going with a more commercially-oriented crowdfunding platform like Kickstarter (see our review) or Indiegogo (see our review), or perhaps one of the new equity crowdfunding sites that have popped up in recent years.

However, for the right kind of startup business — preferably one with a local/community focus and with a compelling story to tell about overcoming adversity — GoFundMe is an attractive fundraising option. One big reason? GoFundMe charges no platform fee to individual campaigns launched from the US, UK, and Canada. The typical crowdfunding site takes 5% of what you raise.

I’ll give three real-world examples of people using GoFundMe to fund a business and finding success.

  • Two Detroit students raised $3,000 to fund their socially-conscious waffle cookie company
  • Owners of a San Francisco restaurant raised $50K to get out of debt
  • A veteran raised $2,000 to start his own motorcycle repair shop

Read on for the eight steps you should follow to get money from GoFundMe to start your own business.

1) Make Sure Your Business Is Right For GoFundMe

Before you go about using GoFundMe to start a business, consider whether your startup is a good fit for GoFundMe. Many of the startups currently using crowdfunding to great effect are in industries that thrive on platforms like the aforementioned Kickstarter: makers of apps, gadgets, and games who typically don’t have an offline presence in the form of a restaurant or shop. Likewise, Patreon (see our review) has become a leading crowdfunder for podcasters, musicians, graphic artists, and other creatives whose work is easily disseminated online.

Crowdfunding with GoFundMe is a different matter, however. Donors tend to contribute to GoFundMe campaigns not to get in on the latest tech trend or trendy tabletop game, but to make a positive difference in the life of people in need or to benefit their community as a whole. Look at the sort of businesses that have had successful GoFundMe campaigns and you’ll note that they typically feature some combination of a) a business that has a positive impact on public life in a community and b) an entrepreneur/business owner with either a sympathetic and compelling personal story to tell or a mission related to charity or social justice.

If neither a) nor b) applies to you and your business, you’d be better off seeking funding from one of the other crowdfunding outfits I’ve mentioned. If at least one of the two does apply to your efforts, you stand a decent shot at making GoFundMe work for your business.

go fund me for business

2) Develop A Business Plan & A Realistic Funding Goal

Have a business plan ready before you start publicly campaigning for money. In particular, make sure you set a funding goal that you expect to actually be able to meet. Define exactly what it is that you plan to do with the money you expect to raise so that in the event you reach your funding goal, you know what to do next.

Of course, all the best-laid plans on Earth won’t help you if you don’t actually raise any money. One way to increase your chances of crowdfunding success is to offer cool rewards to people who donate to your campaign.

3) Offer Multiple Reward Tiers

Remember when I said that GoFundMe donors are motivated mainly by the desire to do good? This may be the case, but you’re still competing for the limited attention of donors with all the other campaigns listed on the site. This is when rewards come into play.

With GoFundMe, as with Kickstarter and many other crowdfunders, you can offer multiple levels of rewards to those who contribute to your campaign. This means that you can offer increasingly higher-value rewards to people who donate larger amounts of money. My advice would be to take advantage of this crowdfunding feature and offer multiple reward tiers to your would-be donors. Give people a reason to feel invested in your success!

While branded trinkets and t-shirts might draw some people in, rewards that give people a taste of your product or service are even better. Offer discounts, coupons and/or gift cards for whatever you have to offer. Get people in the habit of frequenting your business and they’ll be more likely to give you their business on an ongoing basis.

4) Refine Your Campaign Pitch

When creating your GoFundMe campaign page, you’ll obviously want to make it as appealing as possible.

  • Post A Fun Campaign Video: Keep it to around two minutes so you don’t lose viewers’ fickle attention, but don’t be afraid to show a personal touch, as people prefer authenticity and humor to slick sales pitches. You should at least allude to the personal challenges you’ve faced in growing your business. After all, this is GoFundMe, where tugging at the ol’ heartstrings is expected.
  • Make Your GoFundMe Campaign Page As Attractive As Possible: Use high-resolution images to promote your campaign. Preferably images that feature both you and your place of business. Remember: the personal touch is key.
  • Write A Descriptive Title: Try to summarize what your campaign is all about with one phrase. Don’t just write “Business Needs Help” — that doesn’t tell anyone anything or capture their interest. A good, catchy title can help distinguish your campaign from the thousands of others like it!

5) Seek Support From Friends & Family Before Launch

Not to diminish the importance of marketing your campaign to the public at large, but your most important source of support is likely to be your personal network: friends, family, co-workers, acquaintances, etc. Not only are they likely to contribute a significant proportion of what you raise, but it’s essential to secure their support before your campaign goes public. That way, when you launch your campaign, strangers who come across it won’t see “$0” as the amount raised. Success breeds success, and it’s easier to attract public support when you’ve already secured a decent chunk of funding.

You can have family members donate anonymously if you don’t want people knowing how much of your support comes from relatives!

6) Market Your Campaign Via Social Media & Email

To build buzz around your GoFundMe campaign, you’ll need to market it on your social media channels. Use Facebook, Twitter, Instagram and the like to spread the word about your story and your campaign. If you can, try to collect the email addresses of those interested in your campaign in order to build a mailing list in which you can give updates on your business’s progress and whatever other behind-the-scenes material you like. You can use services like MailChimp (see our review) to keep your followers updated with attractive template-based emails in which you can detail your progress.

Try to develop some press contacts as well. This way, when you’re ready to launch, you can alert them ahead of time.

7) Keep Everybody Updated After Your Campaign Launches

There’s a reason it’s called a campaign — you have to work hard to keep the contributions flowing! The uncomfortable truth is that most crowdfunding campaigns, whether they be for business or personal causes, don’t reach their funding goals. If you want to beat the odds, a compelling story and a nifty video won’t be enough. You’ll need to work on your campaign continuously as if it were your job.

Once your campaign is in full swing, keep everyone informed with frequent updates. Don’t just post updates to your GoFundMe page — make sure to send out updates through all your social media channels as well. Go ahead and get personal with your updates. Don’t just rattle off a list of statistics. Document your continuing personal involvement in your campaign for business funding. Be sure to respond to anyone with questions about what you’re doing, both on your GoFundMe page and on social media.

8) Stay Engaged With Your Backers Post-Campaign

Let’s say you overcome your challenges and meet your funding goal. Fantastic! Now, what are you going to do with the contacts you’ve made, the followers you’ve attracted, and the mailing list you’ve started? If you want your business to thrive, you won’t just let them drift away.

Consider an email drip campaign to keep your contacts appraised of your latest doings and to offer special promotions. Stay active on the social media channels you used to such great effect during your campaign. Maintain the relationships you developed with your first customers, as these people will be your most important evangelists, spreading the good word about your business and the friendly, personable owner who treated them so nicely.

In this lonely, atomized world we unconscionably created, people long to experience community. Provide them with one, and they will reward you.

Final Thoughts

Crowdfunding is hard. As I mentioned at the start of this article, most crowdfunding campaigns fail. There’s a reason why crowdfunding hasn’t solved the problems of startup undercapitalization or bankruptcy-inducing medical expenses. However, if you prepare beforehand, build a community of supporters, and approach the task like a job, you’ll greatly increase your chances of success when using GoFundMe to start a business.

Check out the links below to learn more about GoFundMe.

Read our full GoFundMe review

Visit the GoFundMe website

The post How To Use GoFundMe To Fund A Business In 8 Steps appeared first on Merchant Maverick.

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What Is A Merchant Services Provider?

What is a merchant services provider?

If you’ve just started your own business or you’re looking to add credit and debit cards as payment methods, you’re going to be bombarded by a bewildering variety of new terms and concepts that you’ve never encountered before. One very basic term you’ll want to familiarize yourself with is the type of business entity known as a merchant services provider.

To understand what a merchant services provider is and what it can do for your business, you’ll first need to understand the concept of merchant services. This term describes the range of services and hardware and software products that allow merchants to accept and process credit or debit card transactions. Before the internet came along, things were pretty simple. Merchant services consisted of countertop terminals to input card payments, processing services to approve the transaction, and merchant accounts to deposit the money in after the sale. Today, it’s a much more complicated landscape, with eCommerce opening up far more opportunities for selling products remotely than just mail and telephone ordering. Software products such as payment gateways allow customers to pay for purchases directly over the internet, while inventory management and online reporting services give you the power to track virtually every aspect of your business on your computer.

Merchant services providers are sometimes also referred to as acquirers, processors, or merchant account providers. Here at Merchant Maverick, we use the term merchant services providers as a catch-all to cover entities such as merchant account providers, payment services providers (PSPs), payment gateway providers, and any other type of business that allows you to accept payment methods other than cash or paper checks.

Types of Merchant Services Providers

Not all merchant services providers offer the same features, but most fall into one of several categories that help to differentiate them a little from their competitors. The most common types of merchant services providers include the following:

Merchant Account Providers

These entities are the most commonly encountered merchant services providers. A merchant account provider can, at a minimum, provide you with a merchant account and processing services to ensure that you receive your money when a customer pays by credit or debit card. While all merchant account providers can set you up with a merchant account, only a few of the largest companies can also offer processing services to process your transactions. These companies are called direct processors, and include industry leaders such as First Data (see our review), Elavon (see our review), and TSYS Merchant Solutions (see our review). Most other merchant account providers rely on one of these direct processors to process their merchants’ transactions.

Payment Services Providers (PSPs)

While having a merchant account is a good idea for all but the smallest of businesses, you don’t absolutely need one to accept credit or debit card payments. A payment services provider (PSP), such as Square (see our review) or PayPal (see our review) can give your business the ability to accept these kinds of payment methods without a dedicated merchant account. Instead, your account will be aggregated with those of other merchants, and you won’t have a unique merchant ID number. This arrangement has the advantage of virtually eliminating the account fees and lengthy contract terms that often come with a traditional merchant account. However, these accounts are more prone to being frozen or terminated without notice, and customer service options aren’t as robust as they are with a full-service merchant account. PSPs are an excellent choice for businesses that only process a few thousand dollars a month in credit/debit card transactions or only operate on a seasonal basis.

Payment Gateway Providers

With the advent of eCommerce, a new kind of provider has come on the scene: the payment gateway provider. These companies can offer you a payment gateway, which you’ll need to accept online payments. However, they may or may not also offer you a merchant account to go with it. Authorize.Net (see our review), one of the largest and oldest gateway providers, gives you a choice between one of their merchant accounts or using their gateway with your existing merchant account. Other providers, such as PayTrace (see our review), offer a gateway-only service. You’ll have to get your own merchant account from a third-party provider.

Types of Merchant Services

Most merchant services providers offer a wide variety of products and services to allow merchants to accept credit and debit card payments, as well as manage their inventory and track other aspects of their business. Your needs as a merchant will depend on the nature and type of your business. While all businesses will need either a merchant account or a payment service account (if you’re signed up with a PSP), other features will only be useful for certain types of businesses. For example, if your business doesn’t sell anything online, you won’t need a payment gateway. Here’s a brief overview of the most common types of merchant services:

Merchant Accounts

Every business that wants to accept credit or debit cards as a form of payment will need a merchant account. While most merchant account providers offer full-service merchant accounts, those from PSPs like Square (see our review) lack a unique merchant ID number. Merchant ID numbers make your business easier to properly identify to payment processing systems, giving you some protection from fraud and adding stability to your account. A merchant account is simply an account where funds from processed transactions are deposited. Those funds are then transferred by your provider into a business account that you specify, such as a business checking account.

Credit Card Terminals

Retail merchants will also need a hardware product that can read your customers’ credit and debit cards and then transmit that information to your provider’s processing network. Traditional countertop terminals such as the Verifone Vx520 can connect to processing networks via either an Ethernet connection or a landline. Wireless models are also available, but they tend to be bulkier and more expensive than wired models, and require a wireless data plan (usually around $20.00 per month) to operate.

Terminals may be purchased outright or leased from your merchant services provider. Because most providers support the same terminals, we recommend either buying your terminal directly from your provider or purchasing it from a third-party supplier. Terminals require a software load which must be installed before they can accept transactions. If you buy your terminal from a third-party source, you’ll need to have it re-programmed to install this software. We strongly discourage terminal leasing due to the noncancelable nature of the leases and the fact that you’ll pay several times more than the value of the terminal over the lifetime of the lease.

In shopping for a terminal, you should select an EMV-compliant model as a minimum. Support for NFC-based payment methods (such as Apple Pay and Google Pay) is also a good choice as these methods are becoming more popular among customers.

Point of Sale (POS) Systems

POS systems combine the functions of a credit card terminal with a large computer display, enabling you to manage inventory and monitor your sales through a single piece of equipment. These systems include fully-featured, dedicated terminals and tablet-based software options that can run on an iPad or Android tablet. Many providers offer optional accessories such as tablet mounts, cash drawers, and check scanners, allowing you to accept any form of payment through a single device.

Mobile Payment (mPOS) Systems

These systems allow you to use your smartphone or tablet as a credit card terminal. mPOS systems consist of a mobile card reader that connects to your mobile device and an app to communicate with your provider’s processing network. While Square (see our review) was the first provider to offer a simple mPOS system, most providers now offer similar products. Although they’re difficult to find and cost more than simple magstripe-only readers, we recommend selecting a card reader with EMV compatibility and a Bluetooth connection (rather than the traditional headphone jack plug) to future-proof your system.

Payment Gateway

A payment gateway is simply software that communicates between your website and your provider’s processing networks, allowing you to accept payments over the internet. Because not all merchants need a gateway, providers usually charge a monthly gateway fee (around $25.00) to access this feature. Most gateways include support for recurring billing, a customer information management database, and security features such as encryption or tokenization to protect your customers’ data.

Virtual Terminal

A virtual terminal is another software product that turns your computer into a credit card terminal. Transactions can be entered manually or swiped using an optional USB-connected card reader. Virtual terminals are most commonly used by mail order/telephone order businesses that don’t have an eCommerce website.

Online Shopping Carts

Shopping cart software is designed for eCommerce merchants who need a more specialized shopping experience or want to customize the features of their website. Shopify (see our review) is one of the most popular online shopping carts. Check compatibility with your merchant services provider before selecting an online cart.

eCheck (ACH) Processing

eCheck processing is an optional feature offered by most merchant service providers. It allows you to scan paper checks and instantly confirm that funds are available to cover the purchase. This service protects you from fraud and saves you a trip to the bank.

Merchant Cash Advances and Small Business Loans

Merchant cash advances and small business loans provide another way for your business to receive funds when you need them, and most merchant services providers offer them. Check out our Merchant’s Guide to Short-Term Loans for more information.

Final Thoughts

Which specific merchant services you need will depend on the nature of your business. Retail-only businesses won’t need a payment gateway, but they will need reliable credit card terminals. eCommerce businesses can’t function without a payment gateway, but do not require terminals. Of course, if your business operates in both the retail and eCommerce sector (which is becoming more common), you’ll need just about every service your provider has to offer.

Every merchant service provider has their own unique combination of products and services, so you’ll want to ensure that a provider offers the features that you need before you sign up. Many of these services are proprietary, meaning they’ll only work with the provider that offers them. While this helps to ensure compatibility between different products, it also means you won’t be able to take your favorite product with you if you switch providers. This is more of a factor in the eCommerce sector, where payment gateways are often proprietary products. For an overview of our highest-rated merchant services providers, check out our Merchant Account Comparison Chart.

The post What Is A Merchant Services Provider? appeared first on Merchant Maverick.

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10 Great Real Estate Crowdfunding Platforms For Businesses

real estate crowdfunding platforms

When crowdfunding rose on its initial wave of popularity, it was strictly a means of raising money for personal causes and makers of board games and household gadgets and whatnot. That all changed with the passage of the JOBS Act of 2012. The JOBS Act was sold as a response to the lack of capital available to startups in the wake of the Great Recession. It legalized the crowdfunding of securities so that campaigners could raise money from investors in a public campaign.

From there, it was natural that real estate developers would turn to crowdfunding as a new way of attracting investment. Six years after the passage of the JOBS Act, crowdfunding real estate has become quite the growth industry, with countless real estate crowdfunding sites popping up, offering equity and/or debt crowdfunding deals to accredited investors, and, in many cases, non-accredited investors as well.

With the crowdfunding industry projected to be worth in excess of $300 billion by the year 2025, there’s never been a better time for those in the real estate business to consider crowdfunding as a means of reaching investors who would otherwise be inaccessible. Here are 10 of the most popular and well-regarded real estate crowdfunding platforms out there.

1) PeerStreetcrowdfunding real estate

Self-described as a “marketplace lending platform for real estate debt,” PeerStreet was founded in 2013 by real estate attorney Brew Johnson and former Google executive Brett Crosby as a means of giving accredited investors access to real estate investment opportunities. PeerStreet has originated over $500 million in real estate loans as of October 2017. Most remarkably, PeerStreet claims to have not lost a single dollar in investor principal throughout its entire existence.

Let’s get the skinny on PeerStreet’s real estate crowdfunding marketplace.

Best For…

Real estate companies seeking to connect to investors online.

How Does PeerStreet Work?

PeerStreet states the following regarding their loans:

PeerStreet loans are generally secured by first liens on real estate. PeerStreet partners with top-tier originators across the country and carefully vets their loans before making them available to our investors. Most of our loans are short in duration (6-24 months) with LTVs typically below 75%.

PeerStreet applies a servicing fee of between 0.25%-1.00% on each loan offered. Their loans offer, on average, 6-12% annualized returns.

PeerStreet Rules

PeerStreet runs extensive due diligence on both the loans advertised on its site and on its loan origination partners. Before a loan can be featured on PeerStreet, the company does the following:

  • Performs independent underwriting of all loans using both manual processes and big data analytics
  • Reviews an independent valuation (BPO/Appraisal)
  • Ensures each loan complies with PeerStreet’s underwriting guidelines
  • Reviews legal documentation

For loan origination partners, PeerStreet performs the following checks:

  • Reviews track records
  • Reviews financials
  • Reviews licensing and adherence to state usury laws
  • Runs background checks
  • Reviews legal and underwriting processes

PeerStreet’s campaigns have an investment minimum of just $1,000 — lower than the typical $10K investment minimum.

How To Start A PeerStreet Campaign

Contact PeerStreet with details of your loan campaign proposal and wait to hear what they think.

Takeaway

PeerStreet’s reputation among investors is second-to-none, so attracting investors to your real estate crowdfunding project may be easier than with other platforms. Their policy of complete transparency to investors (PeerStreet investors can review the performance of every loan ever featured on the site) and strict vetting for loans and loan originators makes PeerStreet a standout company among real estate crowdfunding platforms.

Visit the PeerStreet website

2) RealtySharescrowdfunding real estate

With over $700 million in real estate investments facilitated since its founding in 2013, RealtyShares is at the tip of the real estate crowdfunding spear. Both equity and debt crowdfunding are available, and every deal on the site is strictly vetted before being allowed to campaign. Read on to learn more about this heavyweight real estate crowdfunding contender.

Best For…

Connecting real estate businesses and projects — both commercial and residential — to accredited investors.

How Does RealtyShares Work?

RealtyShares names three different types of real estate investments that can be listed on its site.

(1)  Cash-flowing/Value-Add equity investments in commercial and residential properties such as apartments, retail, office and pools of single family homes;

(2)  Equity investments in Fix & Flips located in high demand/low supply markets;

(3)  Loans secured by residential and commercial real estate.

On the loan side, RealtyShares lists fixed-rate bridge loans, floating-rate bridge loans, small balance permanent loans, and triple-net loans. On the equity side, RealtyShares lists common and preferred equity offerings. Rates and fees for RealtyShares’s various debt and equity products are given on the website at the links provided.

RealtyShares Rules

RealtyShares does its due diligence for investors by running background and credit checks on all funding campaign sponsors. As for the cost of running a campaign, RealtyShares says the following:

Real Estate Companies that raise capital through our investment platform will be required to reimburse RealtyShares for its out of pocket expenses related to establishing and managing the fund that invests in your project.  These costs typically include legal, accounting and compliance costs.

The exact amount of the reimbursement will depend on the specific investment opportunity. Please contact us here for more details.

Only accredited investors can invest in a RealtyShares campaign. The minimum investment amount is $5,000.

How To Start A RealtyShares Campaign

Create an account on RealtyShares’s site and submit an application. The company will get back to you within 24-48 hours to let you know if you’ve been accepted. It will then request additional information. You’d better know what you’re doing, as RealtyShares states “Currently, only a small percentage of prospective investments are listed on the site.”

Takeaway

RealtyShares has a reputation for being one of the top platforms for crowdfunding real estate deals. Having financed over 1,000 projects in 39 states thus far, the company has a proven track record and is a solid choice indeed for the real estate business looking to source investment.

Visit the RealtyShares website

3) RealtyMogulreal estate crowdfunding sites

Launched in 2013 and headquartered in Los Angeles, RealtyMogul offers both equity and debt financing for real estate projects. Over $338 million has been invested thus far through RealtyMogul, financing over 350 commercial and residential properties valued at over $1.5 billion.

Let’s see what makes RealtyMogul tick.

Best For…

Raising equity for commercial projects and conducting debt crowdfunding for both commercial and residential real estate.

How Does RealtyMogul Work?

RealtyMogul’s FAQ details how their campaigns work, but here are some pertinent details. Real estate companies can raise from between $1 million and $5 million from accredited investors in an equity campaign for commercial real estate. Terms, rates, and fees for RealtyMogul equity raises can be found here.

RealtyMogul also offers debt campaigns for both commercial and residential real estate. Most of these loans are sold to institutional investors. RealtyMogul offers hard money loans, bridge loans, and permanent loans. Information regarding terms and fees can be found here.

RealtyMogul Rules

RealtyMogul runs background, criminal and credit checks on all who apply to campaign.

How To Start A RealtyMogul Campaign

You begin the application process on the website, providing information about your firm, the property in question, and other details. A company representative will then contact you, take you through the due diligence process, and work with you in setting up your campaign.

Takeaway

Through RealtyMogul, the Hard Rock Hotel Palm Springs raised more than $1.5 million in equity financing in what was the first equity crowdfunding campaign ever conducted by a hotel. A pioneer in the industry, RealtyMogul’s track record inspires confidence.

Visit the RealtyMogul website

4) MinnowCFundingcrowdfunding real estate

Founded in 2017, MinnowCFunding is a recent entry to the real estate crowdfunding race. Headquartered in Los Angeles, MinnowCFunding is a “funding portal” as defined by the law. This means it can offer Regulation Crowdfunding, or equity crowdfunding with non-accredited investors. MinnowCFunding does not offer debt crowdfunding.

MinnowCFunding consists of “a team of real estate veterans and advisors with over 50 years of collective experience underwriting and managing residential and commercial real estate.” Let’s learn more, shall we?

Best For…

Real estate companies looking to conduct equity crowdfunding campaigns that are open to all investors, not just accredited investors.

How Does MinnowCFunding Work?

Through MinnowCFunding, equity campaigns can be launched for the following real estate types:

  • Residential rental real estate
  • Commercial real estate
  • Industrial real estate
  • Retail real estate
  • Mixed-use real estate

Due to legal limits on Regulation Crowdfunding, a maximum of $1.07 million can be raised per year by any single entity.

Be warned that MinnowCFunding takes 7% of what you raise as a platform fee.

MinnowCFunding Rules

Companies looking to campaign for equity must undergo strict vetting: “Our experienced real estate and financial experts review the credentials and plans of the investment target.”

The minimum investment amount for a MinnowCFunding campaign is just $1,000.

How To Start A MinnowCFunding Campaign

Contact MinnowCFunding with your crowdfunding proposal and see what their agents tell you. The company doesn’t yet have a lot of information posted regarding the application process.

Takeaway

MinnowCFunding is the new kid on the block when it comes to real estate crowdfunding, yet they’ve generated a fair amount of buzz in the short time they’ve been around. Those in the real estate industry interested in Regulation Crowdfunding should give them a look.

Visit the MinnowCFunding website

5) AlphaFlowreal estate crowdfunding platforms

Judging by the name, you might assume AlphaFlow was some kind of non-FDA-approved prostate supplement. However, you would be libellously wrong. Shame on you.

Founded in 2015, AlphaFlow, in their own words, “purchases first lien mortgage notes from top-tier originators around the nation, providing non-conventional liquidity to residential real estate lenders..” Let’s look at AlphaFlow in greater detail.

Best For…

Connecting real estate companies to investors via loan originators. The loan originator offers the investor a balanced portfolio of diversified real estate investments — the investor doesn’t actually choose the individual projects to invest in.

How Does AlphaFlow Work?

AlphaFlow works with companies like PeerStreet to find residential debt crowdfunding campaigns. They take what they believe to be the best campaigns, make sure they are spread out across the US, and build portfolios to offer investors so the investor doesn’t have to do the heavy lifting.

AlphaFlow describes their loan products as follows:

  • Asset-backed (first-lien) mortgage note
  • Loan amounts between $75K-$2MM
  • 6-12 month duration
  • 7% + interest rate
  • Personal guarantee
 AlphaFlow Rules

The company states the following regarding loan originators wishing to use the platform:

AlphaFlow conducts extensive due diligence on each originator partner. Lender onboarding entails strict review of the firm’s management staff, historical loan performance, underwriting guidelines, quality control metrics, and onsite review by AlphaFlow of their lending operations.

How To Start An AlphaFlow Campaign

Individual real estate companies don’t apply to raise funds on AlphaFlow. Rather, lending platforms apply to AlphaFlow, and if the platform is onboarded, it serves as a source of residential debt deals from which AlphaFlow draws to build its portfolios for investors.

Takeaway

AlphaFlow makes investing in real estate easy by offering portfolios comprised of diversified, pre-vetted residential loans.

Visit the AlphaFlow website

6) Fundrisereal estate crowdfunding sites

Launched in 2012, Fundrise’s brand of real estate crowdfunding is somewhat akin to that of AlphaFlow. Fundrise’s investors see their investments spread out over the company’s portfolio, which includes both commercial and residential real estate. The investor doesn’t choose which projects to invest in.

Investors invest in Fundrise’s portfolio through the vehicles of the eREIT (an electronic Real Estate Investment Trust — it resembles a mutual fund for real estate projects) and the eFund (similar to the eREIT).

Best For…

People who want to invest in real estate but don’t want to choose the individual investments.

How Does Fundrise Work?

Fundrise sources real estate investment from around the US, then offers anybody and everybody (not just accredited investors) the chance to invest in Fundrise’s portfolio.

Fundrise doesn’t publicly release the duration, interest rates, etc. of their loan products. On the investor side, Fundrise allows investments of as little as $500 and takes a 0.85% annual asset management fee.

Fundrise Rules

There are no limits as to who can invest with Fundrise. As for real estate companies looking to raise funds with Fundrise, the company is not publicly seeking new projects right now, so no rules for companies looking for investment are given.

How To Start A Fundrise Campaign

You can’t apply for funding through Fundrise’s website, so you’ll have to contact the company via other channels if you have an irresistible deal to propose.

Takeaway

Fundrise is known for its supreme ease of use for the investor. It’s a great way for the average person to invest in something that is independent from the stock market.

Visit the Fundrise website

7) Patch Of Landcrowdfunding real estate

Born in 2013, Patch Of Land is a hard-money debt crowdfunding site for real estate investments — mostly residential, but some commercial. The company was founded by Jason Fritton (who lobbied for the passage of the JOBS Act that made real estate crowdfunding possible in the first place), and his brother Brian.

On Patch Of Land’s About page, the company posts the following mission statement:

Patch of Land aims to solve the problem of slow, inefficient, fragmented and obscure private real estate lending by using the latest technology, data and process efficiency to more accurately assign risk profiles and project viability, while greatly reducing time and cost of loan underwriting for borrowers with real estate projects that are overlooked or rejected by banks and traditional lenders.

Best For…

Real estate companies and the investors who love them.

How Does Patch Of Land Work?

For real estate projects, Patch Of Land offers three different types of loan program:

  • Fix & Flip Loan Program
  • Rental Loan Program
  • Commercial Loan Program

Details of each loan program are given at the link. One thing each has in common is that you can campaign for a maximum of $3 million USD.

Patch Of Land details the performance of its loans here. Some of the highlights: Patch Of Land has funded 986 loans to the tune of over $442 million with a realized rate of return of 10.88%. (Numbers current as of 3/25/18)

Patch Of Land Rules

Regarding the due diligence process, Patch Of Land states:

We will conduct due diligence process and review all the required documentation, including an appraisal. Typically we can close your loan in as little as seven days. Our process is transparent; we do not charge “junk fees” or hidden fees of any kind.

How To Start A Patch Of Land Campaign

Patch Of Land details the application process for borrowers here. Perhaps the highlight of the process is the fact that filling out the application, according to the company, takes only five minutes.

If you’d rather speak to a person about your prospective funding campaign, call a Patch Of Land agent at 1-888-959-1465 with details of your project.

Takeaway

Check out Patch Of Land’s track record and see if they might be the real estate funding solution you’re looking for.

Visit the Patch Of Land website

8) GroundFloorcrowdfunding real estate

GroundFloor provides debt crowdfunding for residential real estate developers. Founded in 2013 in Atlanta, GroundFloor offers fix-and-flip hard money loans for both accredited and non-accredited investors to, well, invest in.

You can invest as little as $10 in a GroundFloor crowdfunded real estate loan. Yes, $10, no typo. Though, I’m not entirely sure what the point of that would be.

Currently, GroundFloor can only be used in a limited number of US states. I’ll tell you which ones in a bit.

Best For…

Financing fix-and-flip real estate projects.

How Does GroundFloor Work?

GroundFloor describes their loans thusly to borrowers:

  • Rates starting at 5.4%
  • Fix-and-flip hard money loans from $75,000 to $2,000,000 for residential properties (Please note: cannot be owner-occupied)
  • Closing as fast as 15 days
  • Monthly payments or balloon payment at maturity date
  • All points can be rolled into the loan
  • No personal guarantee required
  • Lend up to 70% ARV (after repair value)
  • Borrow up to 90% LTC (loan to cost)
  • Fast and simple application with minimal documentation (no tax returns, no bank statements)

GroundFloor also touts 8-12% annualized returns on average on their loans with 6-12 month terms.

GroundFloor Rules

Of course, GroundFloor doesn’t let projects crowdfund loans without doing some vetting:

The product is based on venture loans to real estate entrepreneurs, originated and serviced by Groundfloor. Prior to offering, every loan is pre-funded by Groundfloor after a thorough vetting of the borrower’s experience, credit worthiness, and business plan, plus an assessment of the property value on an as-is and as-improved basis.

As of this moment, you can only raise funds through GroundFloor in the following states: Massachusetts, Maryland, DC, Virginia, Georgia, Illinois, Texas, Washington, and California. However, GroundFloor recently announced that due to their offering having just been qualified by the U.S. Securities & Exchange Commission under Tier II of Regulation A, they will be operating in all 50 states in short order. Just not quite yet.

Note that in a recent press release, the company said: “Groundfloor has not historically charged any investor fees, but may elect to begin doing so in the near future.”

How To Start A GroundFloor Campaign

If you reside in one of the aforementioned states, apply online and see what GroundFloor says. Alternately, call the company at 678-701-1194 and strike up a chat.

Takeaway

GroundFloor may only be getting started, but they seem to be making some moves to gain a foothold in the industry.

Visit the GroundFloor website

9) EQUITYMULTIPLEreal estate crowdfunding sites

With an all-caps name that makes me feel like I’m yelling at you just by typing it, EQUITYMULTIPLE offers commercial real estate crowdfunding in the form of syndicated debt, equity, and preferred equity raises.

EQUITYMULTIPLE is a young company, having been founded in 2015. However, extolling their familiarity with the field, EQUITYMULTIPLE states:

Experience matters. While other platforms are backed by venture capital companies, we’re backed by a real estate company – Mission Capital, a recognized national leader in commercial real estate debt & equity finance.

Best For…

Commercial real estate developers looking for crowdfunded investment, investors looking for real estate deals, and people who like shouting.

Only accredited investors can invest through EQUITYMULTIPLE.

How Does EQUITYMULTIPLE Work?

Here are the details of EQUITYMULTIPLE’s syndicated debt offerings:

  • Target Rate to Investors: 7-12%
  • Typical LTV: 50-75%
  • Typical Term: 6-24 months

The details for the company’s preferred equity offerings:

  • Target Current Preferred Return: 6-12%
  • Target Total Preferred Return: 50-75%
  • Typical Term: 1-3 years

Lastly, the company’s regular equity offerings:

  • Target Annual Cash Return: 6-12%
  • Target Internal Rate of Return to Investors: 14%+
  • Typical Term: 1-3 years

EQUITYMULTIPLE Rules

Regarding due diligence, EQUITYMULTIPLE describes the platform’s vetting process:

We will provide a comprehensive diligence request list. Once these items are received, our team will determine if the deal meets the requirements of EQUITYMULTIPLE’s investor network. During this time, the Sponsor and EQUITYMULTIPLE will begin discussions surrounding the terms of the anticipated Offering.

How To Start An EQUITYMULTIPLE Campaign

EQUITYMULTIPLE’s deal submission and funding process is detailed here. One key point: once you submit your deal, EQUITYMULTIPLE “will get back to you within two business days with follow-up questions or preliminary approval.”

Takeaway

EQUITYMULTIPLE is a real estate crowdfunding platform just finding its sea legs. Keep an eye on these folks.

Visit the EQUITYMULTIPLE website

10) Small Changereal estate crowdfunding sites

Launched in 2014 and headquartered in Pittsburgh, Small Change may not have the longest track record, but the equity real estate crowdfunding platform distinguishes itself by associating its brand with social responsibility:

We created Small Change to allow everyday people to invest in real estate projects that change cities and neighborhoods for the better, and we created our proprietary Change Index to track that change.

The Change Index is a way for Small Change to assess real estate developments in terms of their access to public transportation, the walkability of the area, access to parks and fresh food, and other factors.

Best For…

Developers of residential, commercial, and mixed-use properties that score sufficiently highly on the company’s Change Index. Non-accredited investors can invest in some projects, while others are strictly for accredited investors.

How Does Small Change Work?

Small Change advertises average returns of between 8-10%. The minimum investment amount on a Small Change project is just $500.

Small Change doesn’t provide much in the way of details as to how their investments perform. Hopefully, this will change in the future.

Small Change Rules

The company’s Change Index is a fairly comprehensive scoring system for how beneficial a real estate development is to the wider community. Projects must hit a certain target score on each metric before being allowed to use the platform. I recommend reading the details of the Index carefully if you’re thinking about using Small Change for your real estate venture.

How To Start A Small Change Campaign

You’ll have to create an account and get in touch with the company to ask about getting your project on the platform. Small Change doesn’t provide any granular detail as to how to do this.

Takeaway

It’s good that at least one real estate crowdfunder seems aware of the fact that not all real estate developments benefit the community and that such developments should be viewed through the prism of social responsibility. For that, I tip my cap to Small Change and the Change Index.

Visit the Small Change website

Final Thoughts

Real estate crowdfunding can hardly be said to be a mature industry at this point. After all, it’s only about six years old. As such, the industry is in flux, and my list of leading real estate crowdfunders would undoubtedly be different if I were to write this article in another few years.

That’s not to say real estate crowdfunding can’t work for you right now — indeed, evidence indicates quite the contrary. Check out the companies I’ve listed above if you want to get a good picture of where the industry stands today.

The post 10 Great Real Estate Crowdfunding Platforms For Businesses appeared first on Merchant Maverick.

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Real Estate Crowdfunding: Is It Right For Your Business?

real estate crowdfunding

With the increasing prominence crowdfunding has attained over the course of the last decade, I’m sure you’re broadly familiar with the concept of crowdfunding. You’ve probably heard of people using GoFundMe (see our review) to try to cover medical expenses and other personal emergencies. You’ve probably also heard of crowdfunding a la Kickstarter (see our review) in which backers contribute to the funding of a board game or gadget or male romper in exchange for rewards in the form of the board game/gadget/romper in question and/or related goodies.

the office swag GIF

However, if you’re involved in a real estate venture, it’s now possible to solicit investment in real estate via crowdfunding as well. As I’ll explain, this is a relatively recent phenomenon, but by allowing owners of real estate to launch public crowdfunding campaigns, funding can be drawn from a much broader pool of investors than was previously possible.

Let’s talk about exactly what real estate crowdfunding is and how it can benefit your real estate business.

Real Estate Crowdfunding & The Jobs Act

Prior to 2012, it was illegal to offer investment in the form of a public campaign in the US, as public solicitation of securities was forbidden by SEC rules. Therefore, real estate crowdfunding was out of the question.

However, the idea of what crowdfunding could be changed significantly when the JOBS Act of 2012 was signed into law. The passage of the Act was framed as a response to the lack of capital available to startups in the wake of the Great Recession, as it legalized the crowdfunding of securities. Subsequently, a great number of real estate crowdfunding sites have popped up.

What Is Real Estate Crowdfunding?

confused math GIF by CBC

Let’s be precise when we discuss real estate crowdfunding. The term encompasses two different forms of crowdfunding: equity-based and debt-based.

Equity-Based Real Estate Crowdfunding

When you open up your real estate venture to equity investment, investors become co-owners of the property in question and stand to profit in proportion to their ownership stake in the property. These profits come in the form of rental income and/or property appreciation.

Debt-Based Real Estate Crowdfunding

With debt-based real estate crowdfunding, you offer investors the chance to lend to you. In return, the investor is paid back the principal plus interest. Mortgages and hard money loans are examples of debt investments in a real estate context.

(For more general information on the differences between different forms of crowdfunding, our article “Types of Crowdfunding For Business: Debt, Equity, Or Rewards” is a good place to start.)

What Do These Differences Mean For Your Campaign?

The substantive difference between these two forms of real estate crowdfunding is that debt investment is safer than equity investment for the investor, but also less potentially lucrative. If something goes wrong and the property in question is foreclosed on, debtholders get paid before equity holders do, so there’s a smaller potential downside for the debt investor. Equity investors bear much more risk.

On the other hand, if the real estate venture does particularly well, equity investors get a share of the windfall profits whereas debt investors do not — they simply get interest on the loan. Equity investment is more high-risk-high-reward than debt investment when it comes to real estate. Keep in mind the type of investments your particular real estate project is likeliest to attract when setting the terms and structure of your real estate crowdfunding campaign.

In order to do this, however, you’ll need to understand what the capital stack is.

pancakes GIF

What Is The Capital Stack?

The capital stack is key to understanding commercial real estate financing (not so much residential real estate). The capital stack is comprised of the different layers of financing arrangements that go towards funding real estate projects. It delineates where investors stand in the pecking order relative to one other.

This is how investors are prioritized, with the highest-priority investors on the bottom:

  • Common Equity (lowest priority)
  • Preferred Equity
  • Mezzanine Debt
  • Senior Debt (highest priority)

Essentially, the risk increases the higher you are on the stack, but so do the returns. Here’s more information on the capital stack.

What Businesses Stand To Gain From Real Estate Crowdfunding?

Let’s discuss the two primary types of businesses that stand to benefit from this new market sector. The first should be fairly obvious.

Real Estate Developers

I can hear you right now: “No kidding, genius.” Of course real estate crowdfunding would appeal to real estate developers. The thing is, it’s the newer developers who stand to gain the most benefit from real estate crowdfunding. That’s because the more established firms have extensive pre-existing relationships with investors and other sources of equity. Crowdfunding isn’t necessarily going to be a priority for them.

Those who have entered the real estate business more recently, however, have every reason to explore crowdfunding. Launch a crowdfunding campaign through one of the many real estate crowdfunding sites out there, and you’ll gain access to investors that you just didn’t have previously — and these investors are the very investors who simply didn’t have easy access to real estate investment opportunities before crowdfunding and the JOBS Act came along.

Many real estate crowdfunders add value by pooling investors into an LLC or other entity specifically set up for the purpose. That way, investors don’t have to be dealt with individually.

Who else can take advantage of real estate crowdfunding to fund their business, you ask?

Real Estate Crowdfunding Platform Owners

This answer shouldn’t come as a shocker either. Think about it, though: real estate crowdfunding is a very new industry, having only just been legalized by the JOBS Act. There may never be a better time to get in on the ground floor of the industry than right now.

Of course, before you launch your real estate crowdfunding business, you’ll need to determine a) what types of financial products can be offered to investors on your site, b) what category of real estate to specialize in (commercial, residential, etc), c) how to build your web platform, and d) how best to market your platform to attract the attention of investors. But if you do your due diligence and manage to answer these big questions, you’ll be entering a field poised to expand by leaps and bounds over the next decade.

It’s estimated that the crowdfunding industry as a whole will be worth more than $300 billion by the year 2025. There are bound to be hiccups along the way, but if you’re thinking that the industry might be for you, this is the time to give it the ol’ college try.

Final Thoughts

1995 was a great time in which to launch an internet search engine. 1970 was a good time to get in on the polyester industry. Some industries present particular opportunities to attuned entrepreneurs at certain defined points in history. Are we in one of those periods now with respect to real estate crowdfunding? Obviously, nobody can say for sure, but all signs point to “Yes.”

Crowdfunding involving investments is legally complex, and federal prosecutors have unlimited resources. Therefore, be sure to get legal guidance from professionals before making the leap into real estate crowdfunding. But if you have the means and the inclination, this is the time to make your move. Don’t be left holding a bag full of woulda-coulda-shouldas while less-talented entrepreneurs rake in those real estate crowdfunding dollars that could have been yours!

The post Real Estate Crowdfunding: Is It Right For Your Business? appeared first on Merchant Maverick.

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8 Facts You Should Know Before Crowdfunding A Video Game On Fig

fig crowdfunding

For as long as I can remember, people have bemoaned the ever-accelerating consolidation of the video game industry. For much of the past two decades, small-to-mid-size game developers have been going bust as industry behemoths like EA grow ever more dominant. For those who have followed the industry, it’s an ever-present trend and one that is not likely to abate anytime soon.

However, the second decade of the twenty-first century has given rise to a phenomenon that could be seen as a countervailing force to this trend; a social media-powered boat, gamely pushing upstream against The Market’s unloved current. Crowdfunding pools the resources of those who want a piece of the next big thing, delivering grassroots funding to projects that would otherwise struggle to get funding.

Anyone with a cursory familiarity with crowdfunding could tell you what Kickstarter (see our review) and GoFundMe (see our review) are, but lesser-known specialty crowdfunders continue to pop up, catering to the particulars of individual industries.

Enter Fig. Launched in 2015 in San Francisco, Fig is a platform on which independent game developers and mid-size game studios can get video games crowdfunded. However, Fig is more than just a “Kickstarter for Video Games.”

It’s a unique crowdfunding system and one that presents unique challenges to those looking to use crowdfunding to finance their gaming dreams. Let’s go through what you need to know before using Fig’s crowdfunding platform for game developers.

1) Fig Provides Both Rewards Crowdfunding & Equity Crowdfunding For Video Games

With Fig, you can set up a crowdfunding campaign for your incipient game project that gives the would-be backer two options: back a traditional rewards crowdfunding campaign in exchange for a copy of the game, branded swag, expansion packs, etc., or back an equity crowdfunding campaign in which the backer becomes an investor who buys Fig Game Shares and thereby stands to profit from future sales of the game.

Actually, I lied. The backer also has a third option: back both!

You probably have a decent handle on what rewards crowdfunding is, but with Fig’s equity crowdfunding, investors fund your game’s development by buying Fig Game Shares (more on how Fig Game Shares work later). At the end of the process, the profits from sales of your game are divided between your company, Fig, and the equity investors who bought Fig Game Shares in your game

2) You Can Run Both A Rewards And An Equity Campaign Or Just A Rewards Campaign

I said in the introduction that Fig wasn’t just “Kickstarter for video games.” However, if you’re not trying to raise six or seven digits’ worth or capital, you can, in fact, treat Fig as if it were Kickstarter and just run a rewards crowdfunding campaign. Describe/show off your cool game, offer various rewards for different tiers of support, and hope to raise your goal within your funding period.

However, most Fig campaigners opt to run both a rewards campaign and an equity campaign concurrently. This way, you can attract support from the more casual backer who may want to see your game produced and ultimately receive a copy, as well as the investor who sees profit potential in your game idea and wants to support it in exchange for a cut of future sales.

Check out the campaign page for Pig Eat Ball if you want to see what Fig’s unique brand of rewards/equity hybrid crowdfunding looks like in action.

3) Fig Is Selective

Some crowdfunding platforms allow anybody who signs up and creates a profile to launch a crowdfunding campaign on their platform. Not Fig. According to the company, when a developer applies to use the platform:

We evaluate the game and the developer to determine whether, in our opinion, they have the potential to generate significant income based on criteria such as experience and talent of the developer, the developer’s record for delivering games on time and within budget, our estimates of potential sales of the game and the extent of the game’s existing social community and fanbase.

Also note that Fig only hosts one or two new funding campaigns per month. When considering whether to send your pitch to Fig, determine whether you can afford to, in effect, wait in line for your chance to be featured on the site.

4) Funding Is All-Or-Nothing For Both Rewards And Equity Campaigns

Just about every crowdfunding platform requires you to set some kind of funding goal before launching your campaign. Some crowdfunders let you keep whatever money you end up raising regardless of whether or not you’ve reached your funding goal before your funding period ends.

Not so with Fig. Launch a Fig crowdfunding campaign, and you’ll have to meet or exceed your funding goal before you can collect. Fail to reach your funding goal, and you’ll get nothing at all. This goes for both rewards and equity campaigns. You’ll want to have done your due diligence before launching your campaign with Fig, as an 80% funded project will see you get 0% of the cash.

5) Investors Aren’t Actually Buying Shares Of Your Company

Launch an equity crowdfunding campaign with Fig and you won’t have to worry about investors owning a portion of your intellectual property. That’s because with Fig’s unique equity crowdfunding system, the investor invests in stock created by Fig to pay dividends based on the sales receipts from the game post-release. Fig describes the system like so:

Developers maintain 100% creative control and IP ownership over their game. The community invests in Fig Game Shares, which pay out based on Fig’s own revenue share gained through a licensing agreement with the developer, and Fig takes on the accounting and legal risk associated with the investments as it’s our stock. Developers are not involved in selling investments, nor are investors investing in studios or IP.

Here’s where you can learn more about Fig Game Shares. Essentially, they allow you to retain full ownership of your company and its products while offering investors the chance to profit from your future game sales commensurate with the proportion of Fig Game Shares they purchased.

6) Fig’s Rewards Crowdfunding Campaigns Carry No Platform Fees

If you’re using Fig as if it were Kickstarter and just want to run a rewards campaign, there’s one way in which Fig is actually superior to Kickstarter. Let me explain.

Kickstarter, like most non-charitable crowdfunding sites, charges a 5% platform fee from what you raise. Factor in payment processing fees, which can come to about 3-5% of what you raise, and you could be paying 8-10% of what you raise in fees.

Fig, however, does things differently. Launch a rewards campaign with Fig and you won’t pay any platform fees. You will only have to pay credit card processing fees. These will come out to about 2.5% of what you raise. If you’re an independent game publisher looking to use rewards crowdfunding to get your project started, this factor alone gives Fig a leg up on the competition.

For Fig’s equity crowdfunding campaigns, the company states the following:

If and only if the campaign succeeds, a portion of Fig’s out-of-pocket legal and accounting transaction costs will be deducted from the investment proceeds (up to 5%).

7) Fig Can Publish Your Game As Well

Fig states the following regarding its publishing services:

Fig stands as a non-exclusive co-publisher of your game, so you can maintain control over the publishing of your game while receiving Fig’s support in distribution and marketing. Fig is open to exclusively publishing your game if that is your desire. Some developers have requested we exclusively publish their games.

Fig’s publishing services can be opted into — you are not required to use them to publish your game.

8) You Can Run A Private Funding Campaign Before You Go Public

Is your video game idea still in its embryonic stage? Is it unworthy of being seen by the general public at this point? You might want to consider running a private funding campaign before you run a public one.

Fig’s Backstage Pass Program lets you do exactly this. Through this program, Fig’s most hyper-attuned backers can evaluate your campaign away from the prying eyes of the public and give you valuable feedback, all while you start the fundraising process, getting a head-start on your public crowdfunding campaign.

Disclaimer

Here’s a disclaimer I’ve started attaching to everything I write related to equity crowdfunding:

Bear in mind that equity crowdfunding is a still-evolving field, with the full impact of the JOBS Act still being assessed. Equity crowdfunding is a more complex proposition than, say, rewards-based crowdfunding, as investing is much more substantially regulated. Consult an attorney if you have any legal questions regarding the process, SEC regulations, taxes, etc.

Final Thoughts

No form of popular entertainment inspires as much passionate devotion (among other things) as does the video game. For those looking to get in on the ground floor of the industry, crowdfunding is a way you can fund your passion projects while a) retaining control of your work, and b) not going into debt.

Fig’s particular brand of video game crowdfunding gives independent developers and game studios alike the ability to fund their work by monetizing the all-consuming devotion of video game fans. Just make sure you know the essentials before you embark on your crowdfunding journey.

The post 8 Facts You Should Know Before Crowdfunding A Video Game On Fig appeared first on Merchant Maverick.

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GoFundMe Alternatives: 10 Sites Like GoFundMe For Business Funding

gofundme alternatives

In terms of raw numbers, GoFundMe (see our review) stands atop the crowdfunding industry. With over $5 billion in crowdfunded dollars raised from over 50 million donors since its founding in 2010, no crowdfunding platform has been able to match GoFundMe in terms of transferring money to those who need it. What’s more, since late 2017, GoFundMe has started eliminating their 5% platform fee for individual crowdfunding campaigns (the 0% platform fee now applies to campaigns started in the US, UK, and Canada).

However, there are plenty of reasons why an entrepreneur looking to crowdfund a startup or a small business might look for an alternative to GoFundMe. While people can and do use GoFundMe to fundraise for businesses, the vast majority of campaigns on the site are personal campaigns for charitable causes, often to cover medical expenses. Facilitating commerce isn’t the focus of GoFundMe’s brand.

Let’s go through some of the GoFundMe alternatives you can use to fund your business.

Kickstarter

Kickstarter (see our review) needs no introduction, but I’ll write one anyway out of habit. Between Kickstarter’s 2009 birth and today, the company has become synonymous with crowdfunding. Kickstarter has raised over $3.5 billion in funding pledged to its campaigns (more than any crowdfunding site besides GoFundMe), boasts more than 140,000 successfully funded projects with over 14 million total backers. You might say the folks at Kickstarter have hit the big time.

Kickstarter embodies the concept of rewards crowdfunding: crowdfunding in which backers support campaigns and receive rewards in return, typically in the form of the product being produced.

Best For…

Kickstarter helps artists, musicians, filmmakers, designers, and other creators find the resources and support they need to make their ideas a reality.

Thus reads Kickstarter’s About page. It sums up Kickstarter’s target audience: those in the business of creating things to share with others. For instance, Kickstarter almost single-handedly spawned the current “golden age” of tabletop games. Game makers found Kickstarter to be the ideal platform from which to launch their passion projects. Tech startups have hit paydirt on the platform as well.

How Does Kickstarter Work?

Kickstarter’s product on offer is its rewards crowdfunding platform. The details of the platform are as follows:

  • Campaigns can be open for 30 to 60 days
  • Campaigns are all-or-nothing — you either meet your funding goal by the time your campaign ends, or you get no funds whatsoever
  • A 5% platform fee is taken from what you raise
  • A 3% + $0.20 payment processing fee is taken from each pledge made to you

Kickstarter Rules

Kickstarter has five rules for projects:

  • Projects must create something to share with others
  • Projects must be honest and clearly presented
  • Projects can’t fundraise for charity
  • Projects can’t offer equity
  • Projects can’t involve prohibited items

Pay special attention to the first rule. In order to host a Kickstarter crowdfunding campaign, you must offer rewards to your potential backers. It’s not optional. Furthermore, these rewards must be of your making and must relate to your project. They can’t just be whatever you have sitting around the house.

How To Start A Kickstarter Campaign

Go to the website, choose a category, enter the basic details of your project into the form, and confirm your identity. When you submit your project for review, you might pass the automated check and be able to start immediately, or your project might be flagged for additional screening, which can take up to three days. Kickstarter estimates that about 80% of submitted projects are accepted.

Takeaway

Hobbyists, tech geeks, and superfans continue to demonstrate their willingness to spend money on crowdfunding projects in order to get in on The Next Big Thing, and Kickstarter is the best-known place to do just that. Their track record of crowdfunding success is second to none. It’s very competitive, though, so you best have done your due diligence prior to launch. If you have, who knows? Your project could take off on social media and become the next great cultural phenomenon; the next viral dream that captures the imagination of a generation; the next RompHim.

romphim

I only pray you experience such spiritual validation in your lifetime. Kickstarter: Catch the fever!

Read our full Kickstarter review

Visit the Kickstarter website

Indiegogo

Indiegogo (see our review) was launched at the Sundance Film Festival in 2008. It was originally conceived as a crowdfunding platform for independent films. Soon thereafter, Indiegogo expanded its mission, and is now a leader in the crowdfunding industry. Indiegogo’s rewards crowdfunding platform is more flexible and less exclusive than that of Kickstarter, as Indiegogo doesn’t prescreen projects prior to launch. Many startups have found success on Indiegogo after being rejected by Kickstarter.

Indiegogo also hosts equity crowdfunding campaigns through a joint venture with MicroVentures (see our review). Equity crowdfunding means your backers are purchasing shares in your company — they aren’t just backing you to get a t-shirt or a board game. Because equity crowdfunding involves investing, it is much more heavily regulated than rewards crowdfunding. Unlike Indiegogo’s rewards crowdfunding campaigns, the requirements to launch an Indiegogo equity crowdfunding campaign are fairly stringent. The bulk of Indiegogo’s business is on the rewards crowdfunding side.

Best For…

Indiegogo appeals to a lot of the same entrepreneurs and creators as Kickstarter. Tech, games, and the arts (particularly movies, no surprise) are well represented in Indiegogo’s campaign listings. But because Indiegogo doesn’t curate its campaigns the way Kickstarter does, a broader array of businesses can fundraise successfully with Indiegogo.

How Does Indiegogo Work?

Indiegogo’s rewards crowdfunding platform carries the following conditions:

  • Campaigns can last up to 60 days
  • You can choose a keep-what-you-raise campaign (you keep what you raise whether you meet your funding goal or not) OR an all-or-nothing campaign
  • 5% platform fee
  • 3% + $0.30 payment processing fee (per pledge)

Indiegogo Rules

Indiegogo doesn’t restrict entry to its platform — you can start a campaign for just about any non-charitable purpose. Unless you’re later found to be operating a fraud or otherwise violating the terms of service, you’re good to go. And unlike Kickstarter, Indiegogo doesn’t mandate that you offer rewards. They do highly recommend it, however. Campaigns that don’t offer rewards have a tendency to fail.

How To Start An Indiegogo Campaign

Just go to Indiegogo’s website, click “Start A Campaign,” detail your campaign, and launch it!

Takeaway

Indiegogo’s welcoming approach and flexible campaigns make it an excellent crowdfunding choice for businesses and artists of all stripes.

Read our full Indiegogo review:

Visit the Indiegogo website

Patreonpatreon

Patreon (see our review) may be a rewards crowdfunding site, but compared to the likes of Kickstarter and Indiegogo, Patreon is a beast of a different nature. Launch an Indiegogo campaign, and it’s a one-time deal. Once your campaign ends after 30 or 60 days, you get what you get, and that’s that. But with Patreon, your campaign is continuous. It doesn’t end unless you end it. Patrons sign up to support you on a recurring basis (either per-month or per-creation), somewhat akin a subscription service. In return, you provide your patrons exclusive content. Founder and musician Jack Conte discussed his motivations in a 2013 article:

“I’m releasing new things on a monthly basis. I have friends releasing material weekly,” Conte said. “They’d have to almost invent an excuse to raise money after going on Kickstarter once. We’re saying, ‘No, no. Don’t make up a new endeavor. Keep doing what you do best and let people pay you each time you do that.”

Best For…

Those in the business of creation will find Patreon an ideal crowdfunding platform. Game designers, journalists, musicians, comic book artists, and YouTubers are all to be found, though podcasters have had particular success on the platform. From Chapo Trap House to Sam Harris to everything in between, Patreon has been a boon to podcasters.

One thing Patreon has allowed in the past that most crowdfunding sites haven’t is a certain degree of adult content, though that has been changing as of late.

How Does Patreon Work?

These are the terms of using Patreon:

  • Funding duration is unlimited
  • Can charge patrons per month OR per creation
  • 5% platform fee
  • ~5% payment processing fee

Patreon Rules

As long as you don’t violate the terms of service (which are more relaxed than those of many competitors), you should be fine.

How To Start A Patreon Campaign

Sign up online, fill in the form fields, and poof, you’re in!

Takeaway

If creation is your business and GoFundMe doesn’t quite fit what you do, Patreon and its innovative brand of continuous rewards crowdfunding provide a means of monetizing your work.

Read our full Patreon review

Visit the Patreon website

FundRazrfundrazr

FundRazr (see our review) refers to itself as “Canada’s leading crowdfunding platform.” Though that places it well behind the likes of Kickstarter in regards to total money raised, FundRazr distinguishes itself by having an exceptionally good reputation for a crowdfunding site among both donors and campaigners. I had a hard time finding comments from user upset with the product. This is most definitely not the case with most of the competition!

FundRazr hosts a wide variety of personal and charitable crowdfunding campaigns, though they host business campaigns as well (and not just in Canada).

Best For…

Pretty much any business with something to offer backers can make use of FundRazr.

How Does FundRazr Work?

This is what a FundRazr crowdfunding campaign entails:

  • No mandatory time limit for campaigns
  • Keep-what-you-raise OR all-or-nothing funding — your choice
  • 5% platform fee
  • 2.9% + $0.30 payment processing fee (per pledge)

FundRazr Rules

FundRazr doesn’t prescreen campaigns, nor does it have any particular bent as to what sort of businesses it favors. And while business campaigns should offer rewards, it isn’t mandatory.

How To Start A FundRazr Campaign

Create an account, fill in the details, and you’re on your way.

Takeaway

FundRazr isn’t the most high-profile crowdfunding service in the business, but its exceptional reputation for treating people well makes it worth considering for the startup in need of funding.

Read our full FundRazr review

Visit the FundRazr website

Fundablefundable

The name resembles FundRazr, but this is a very different platform. Ohio-based Fundable (see our review) is a crowdfunding platform exclusively for businesses. Fundable hosts both rewards and equity-based funding campaigns. Rather than charge a platform fee to users, Fundable charges a monthly fee of $179 to all campaigners. It’s a system that favors serious startups and early-stage companies over small-time artists and creators.

Fundable has sent $411 million in crowdfunded dollars to businesses thus far. Not too shabby at all.

Best For…

Fundable hosts crowdfunding campaigns for a wide variety of businesses, though tech, food service, and healthcare companies are particularly well-represented.

How Does Fundable Work?

Fundable lets you launch both rewards and equity crowdfunding campaigns, though not both simultaneously. Some businesses start with a rewards campaign and, once successful, use the campaign’s success to demonstrate the product’s viability in the market to investors, thus laying the ground for an equity campaign.

Here’s how Fundable campaigns work:

  • No mandatory time limit for campaigns
  • All-or-nothing funding
  • $179 monthly fee
  • 3.5% + $0.30 payment processing fee (rewards campaigns only)

Given the monthly fee and all-or-nothing funding, if your campaign is unsuccessful, you won’t just have raised nothing — you’ll have spent money in order to raise nothing. Try not to fail!

Fundable Rules

Though just about any business can apply to use Fundable, the company prescreens every campaign profile submitted before allowing it onto the platform. A poorly-resourced startup may have better luck using a site with no barrier to entry, like Indiegogo, to crowdfund.

How To Start A Fundable Campaign

Fill out the online application, submit it, and wait for an answer from the company.

Takeaway

Fundable’s terms and fees make it tough for the little guy, but a startup with high growth potential stands to benefit from the absence of the 5% platform fee many crowdfunding sites impose. After all, if you raise $50K, well, 5% of $50K is a lot more than Fundable’s $179 monthly fee!

Read our full Fundable review:

Visit the Fundable website

Wefunderwefunder

Wefunder (see our review) has been an innovator in the equity crowdfunding space. A purely business-oriented crowdfunding platform. Wefunder hosts equity campaigns in which non-accredited investors can invest (this is known as Regulation Crowdfunding). The term “accredited investor” basically just means “rich person,” so by allowing non-accredited investors (i.e. everyone) to invest, you’re casting a wider net in your hunt for investors, so to speak.

Equity crowdfunding with non-accredited investors has only been legal since May 2016, but so far, Wefunder holds 50% of the market share in Regulation Crowdfunding. It’s a new field, but Wefunder has it figured out more than anybody.

Best For…

Wefunder hosts funding campaigns for many different business types (particularly craft breweries), but as equity crowdfunding is harder to pull off for unless your project already has some resources behind it, Wefunder is best for startups whose high-profit potential is apparent to investors. In fact, Wefunder states that of the 174 companies that have hit their funding goal on Wefunder’s site, “most are alumni of Y Combinator.” The cream of the crop, in other words.

How Does Wefunder Work?

Wefunder offers equity crowdfunding under the following terms:

  • 1-year funding limit
  • All-or-nothing funding
  • $195 one-time fee
  • 7% platform fee
  • No payment processing fees (all funds are transferred offline)

The 7% platform fee seems a bit high, but consider that with most crowdfunding sites, an additional 3-5% goes to the payment processor, making that apparent 5% platform fee more like 8-10%. Wefunder doesn’t handle online payments, so there are no processing fees to be paid.

Wefunder Rules

Wefunder allows just about any applying company onto its site. The company doesn’t do the heavy vetting that other equity crowdfunders engage in. Wefunder recommends having at least one experienced investor endorse your campaign and set the terms of your raise, but that’s not a requirement.

How To Start A Wefunder Campaign

Just apply online on the website.

Takeaway

Wefunder is one of the few crowdfunding companies with a track record of success in Regulation Crowdfunding. Startups with high growth potential have reason to take a closer look.

Read our full Wefunder review

Visit the Wefunder website

Crowdfundercrowdfunder

The forgettably-named Crowdfunder (see our review) is unapologetic about being an equity crowdfunding platform for “high-impact ventures” only. Crowdfunder’s equity campaigns are open to accredited investors only, meaning that you’ll be drawing from a smaller, richer, and likely more selective pool of investors than with Wefunder. (Note that the British rewards crowdfunding site named Crowdfunder is an entirely different company)

$160 million in investment commitments have been made via Crowdfunder.

Best For…

Crowdfunder has specific ideas about the identity of its target audience:

Crowdfunder is designed for early-stage startups and more mature businesses raising seed stage, Series-A & Series-B funding. Our offering does not cater to inception stage companies at this time.

Tech, software, and investment companies comprise many of the businesses using Crowdfunder

How Does Crowdfunder Work?

Here are the details of Crowdfunder’s platform:

  • No mandatory time limit for campaigns
  • Keep-what-you-raise funding
  • $449-$749/month subscription fee (depends on your subscription package)
  • No platform fees or payment processing fees (funds are transferred offline)

Crowdfunder’s monthly subscription fees are high. No getting around it.

Crowdfunder Rules

You can set up a profile for free, but in order to actually start your equity campaign, Crowdfunder will have to approve your plans.

How To Start A Crowdfunder Campaign

Sign up and apply through the website, silly.

Takeaway

If your startup company has boundless potential in the eyes of investors, Crowdfunder is a very intriguing prospect. Though the monthly fees are high, they’ll be worth it in the end if you raise a significant sum, as Crowdfunder campaigns don’t carry a percentage platform fee.

Read our full Crowdfunder review

Visit the Crowdfunder website

Ululeulule

Headquartered in Paris, Ulule (see our review) is one of Europe’s largest rewards crowdfunding platforms. It’s not widely known in the US, but if you’re in North America and your project appeals to the European market, it’s definitely a crowdfunding site to consider.

Ulule distinguishes itself with what it claims is the highest rate of successful campaigns for any crowdfunder: 65%. The company attributes this to its focus on personalized coaching, which it provides to all campaigners. Indeed, Kickstarter’s success rate is approximately half that of Ulule!

Best For…

Any sort of business can campaign on Ulule, though art-related startups seem to do particularly well.

How Does Ulele Work?

Ulule’s crowdfunding campaigns are structured like so:

  • Campaigns can last up to 90 days (45 is recommended)
  • All-or-nothing funding
  • Platform fees: 6.67% of all funds received via credit card, 4.17% of funds received via check or PayPal
  • ~3% payment processing fee

Ulule’s fee structure could stand to be less complex.

Ulele Rules

Launching a Ulule crowdfunding project requires passing two validation stages. Ulule really wants to make sure your plan is solid before letting you loose on the platform. If you are ultimately accepted, you’ll be assigned a “success manager” to help you with every stage of your campaign. Compared to most of the competition, particularly in the rewards crowdfunding space, Ulule is quite hands-on in its approach to campaigners.

How To Start A Ulele Campaign

Write Ulule an essay explaining why you think you’re worthy of their platform and send it to them in the mail.

I kid, I kid. Just apply online.

Takeaway

Ulule does things differently than most of the crowdfunding sites on this side of the pond. More consultation, more guidance. Does this approach jibe with your needs? If your company produces things that have Continental appeal, give Ulule a closer look.

Read our full Ulule review

Visit the Ulule website

Republicrepublic review

Republic (see our review) is, like Wefunder, a Regulation Crowdfunding platform — an equity crowdfunding outfit open to any and all investors.

Founded by AngelList alumni and considered to be an AngelList spinoff, Republic stands out for its public commitment to social justice. The company’s About page details their intention to help level the playing field when it comes to capital by prioritizing women, minorities, and others who the investing world has historically overlooked.

Best For…

Republic may have egalitarian aspirations, but equity crowdfunding is nonetheless best suited to companies with uniquely high-profit potential.

How Does Republic Work?

Republic’s equity crowdfunding campaigns are structured as follows:

  • 1-year funding limit
  • All-or-nothing funding
  • 7% platform fee
  • 3.5% payment processing fee for payments made via credit card

Republic Rules

Companies applying to Republic undergo a thorough evaluation before being allowed to raise funds. The following factors will be taken into consideration:

  • Experience of founders and management team
  • Products, services, and market
  • Revenue and growth
  • Customer base and demographics
  • Fundraising needs
  • Offering terms
  • Business plan
  • Financial health
  • Recordkeeping procedures

How To Start A Republic Campaign

Just apply online through the website.

Takeaway

Being an AngelList spinoff, Republic is already making waves in the equity crowdfunding world. Does its idealistic outlook match reality? The years to come should give us our answer. In the meantime, if you run an exceptional startup and you come from a historically-underserved community, Republic wants your attention.

Read our full Republic review

Visit the Republic website

Kiva USkiva logo

And now for something completely different.

Kiva US (see our review) doesn’t offer rewards crowdfunding or equity crowdfunding. What the heck do they do, then? They offer debt crowdfunding, otherwise known as crowdfunded loans. Kiva US is a nonprofit entity, and the crowdfunded loans it offers carry 0% interest. Not bad, eh? It may be the only platform in which lenders stand to make no profit whatsoever. Kiva’s mission is to open up the lending world to businesses that would otherwise struggle for funding. If you need $10K or less for your business and are willing to wait a bit for your money, Kiva’s crowdfunded loans just might be for you.

Best For…

Absolutely any sort of business can apply for a Kiva US crowdfunded loan.

How Does Kiva US Work?

Here are the details of Kiva’s crowdfunded loans:

  • Borrowing amount: $25 – $10K
  • Term length: 6 – 36 months
  • 0% interest
  • Time to funding: 1-3 months

Kiva US Rules

The only requirement to receive a Kiva US loan is that you put the money towards business expenses.

How To Apply For A Kiva US Loan

Yes, you apply online, but that’s only the first step to getting a Kiva loan. The entire process is as follows:

  1. Fill out an application online
  2. Enter the approval stage
  3. Enter a 15 day private funding period
  4. Enter a 30 day public funding period
  5. Get funds within 5 – 7 days

The process takes a while — certainly longer than with other lenders — but then again, crowdfunding with rewards/equity is hardly an instantaneous process either.

Takeaway

If you own a business, you need less than ten grand, and you want a loan you won’t have to pay interest on, Kiva US is your only funding option. Assuming you can wait a while before seeing any funds, there’s no reason whatsoever not to give it a shot.

Read our full Kiva US review

Visit the Kiva US website

Final Thoughts

If you find yourself looking for a crowdfunding site with more business-specific features than GoFundMe, the ten companies I’ve mentioned are all solid possibilities, depending on the nature of your business, its potential, and whether you want to offer rewards, equity, or debt payments with interest to your potential backers. Consider what makes sense for your business, then make the jump while you can! Your ideas won’t stay ripe indefinitely. Don’t wait too long!

The post GoFundMe Alternatives: 10 Sites Like GoFundMe For Business Funding appeared first on Merchant Maverick.

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