Many small businesses and startups explore external financing options through debt. In fact, the Consumer Financial Protection Bureau estimates the small-business lending market amounts to approximately $1.4 trillion.
However, the world of small-business lending is a black box to many. Business owners submit their applications, hope for the best, and have no idea as what's going on behind the curtain.
To help shed some light on the small business lending process, we sat down with Greg Powell, Head of Brand and Product Marketing at Fundbox, one of the world's leading online lenders. Greg was able to walk us through a number of tips around the underwriting and application process, as well as the small-business lending space and Fundbox and the alternative financing options they provide.
This interview has been condensed and edited for clarity. If you're a small-business owner interested in sharing your funding story, tweet us at @ValuePenguin.
Can you describe Fundbox and the different products you offer?
Fundbox provides access to credit for small businesses in two ways: First, we have a line of credit where businesses can apply in just minutes and get a credit decision in under three minutes (based on the median decision time for Fundbox customers). If approved, the funds arrive as soon as the next business day. It's a very fast, easy, streamlined line of credit product for small businesses. Second, we offer Fundbox Pay, and it helps remove a lot of the friction that small businesses face when they transact with other small businesses. So Fundbox Pay sits between the buyer and seller and provides the seller with payment right away while the buyer gets net terms so they can take their time to pay.
How does Fundbox differ from a traditional bank?
There are a few ways.
Speed: It just takes a few minutes to submit information about your business, and we can provide a credit decision for you in three minutes or less. Basically, while you're in the same browser session, you've applied and heard back about the status of your application. If approved, funds then arrive soon as the next business day. Whole thing, end to end is extremely fast. That applies to both our line of credit and Fundbox Pay.
Ease of Use: We've really put a lot of thought into every single screen of our product because we understand that small businesses don't have much time. They're not sitting around thinking about new ways that they can apply for funding. Funding is just a means to an end for them. We want to be a useful tool that fits within their busy lives. We've made it as easy to use as possible. Fundbox is designed to get customers in and out really fast so they can get their money quickly, and go back to running their business.
Transparency: We make sure our customers always know the fees in advance. There are no hidden fees. We don’t have any subscription fees, activity fees or any other additional fees that some lenders charge when they sign up their customers. We have a flat fee structure which makes everything very, very easy to understand. If you repay early, you can save a lot as we don’t have any early repayment fees. We also have teams of really friendly people standing by to help during normal business hours.
How does a small-business owner figure out which financing option is right for them?
That largely depends on your business goals. First, I would ask what the money will be used for. If you’re looking for a single large purchase like buying a large piece of equipment or acquiring another business, consider a term loan. It’s good because you’ll likely know how much you’ll need and, you can spread your one time purchase over the term of the loan.
If you’re looking for ongoing working capital for continuous cash flow to help you grow your business, then consider a line of credit. A line of credit might not get you as high of a limit as a loan but you only pay for what you need. The benefit to a revolving line of credit is that as you pay the principal, that amount then becomes available again in your credit limit. The problem with using a lump sum for adhoc use is that you end up paying interest on a large chunk of money you may not need right away.
Then, we have invoice factoring. Some small businesses that have outstanding invoices that know it’ll take a long time to get paid choose to factor their invoices. With factoring, you're essentially selling your invoices to someone who collects on your behalf. This can work if your customers are large companies like Fortune 500s and you know it'll take them 120 days to pay you. You can sell your invoice to a factor, and that factor will then collect from your customer. Most people don't like factoring when you have a more intimate relationship with your customers because the lender collects on your behalf. They contact your customers directly and most businesses like to maintain their relationships. Additionally, factors will usually take a discount off the top. This differs a lot from Fundbox, which is an invoice financing product. Fundbox works like a line of credit that you draw against outstanding invoices, but we pay you 100% of the value upfront. You pay us back over 12 or 24 weeks. If you repay early, we’ll waive all the remaining fees. We never contact your clients.
Finally, the last major option is merchant cash advance, and it is most common amongst retailers or businesses that deal with daily receipts, and have a high velocity of small transactions. Cash advance companies will determine how much to lend to you, depending on your receipt volume, and they take a percentage of your receipts on a daily, weekly or monthly basis. This can be good for some people who have enough volume that they can afford the payments, but keep in mind the rates can be between 200400%. On top of that, the debits back to the lender often happen daily.
There are pros and cons to each product, but I would recommend anyone really do their research and understand how the pricing works.
What is your criteria when considering applicants?
We typically have three things we look out for: A business bank account is necessary for us. If you don't have one, you will get rejected. Second, we look at transaction volume. We like to see at least three months of transaction volume, but ideally we'd like to see 12 months. Lastly, we like to see a bare minimum of $50,000 in annual revenue.
What are some application tips? Mistakes to avoid?
The more info you can provide, the better. Make sure the info you present shows the best and most complete picture of your business. Either choose to show multiple bank accounts, if you have multiple, or choose the single one that best reflects your performance. That's also true with your accounting information, and make sure all of your information is up to date.
Understand how you'll be evaluated. A lot of banks, for example, want to see big cash reserves before they'll lend to you. If you're a growing business and need to reinvest your revenue back into your business to fuel growth, you likely won't have significant cash reserves. If this is the case, consider a lender that rewards growth. For example, Fundbox does that. We don't need to see high cash reserves.
Whenever I talk to a lot of small businesses, they immediately go to a bank. Well a bank is not always the right choice for a lot of small businesses, even though they're ubiquitous. Just understand that you have options.
Any mistakes people make during their credit term?
One practice that we really discourage is using a loan to pay for a loan. Migrating and consolidating debt are normal business practices, but be careful when you do that because sometimes it's a Band-Aid solution that masks underlying problems where you might be getting into more debt than you can handle.
Another bad practice is drawing funds with no plan. When you want to make an investment, think about the returns on that investment. How much revenue are you going to generate from that investment? Will it be enough to cover the added fees you’re going to have to pay as a result of using your line of credit?
Understand how the lender wants to be repaid and when. As I said earlier, the typical line of credit or credit card allows you to almost indefinitely carry a balance, and this means you can get into a debt spiral, so businesses need to be careful. We've talked to a lot of small businesses that have gotten into this problem because they don't manage it closely.
Lastly, understand if there are any penalties to repaying early. This can be in the form of front-loaded fees, or other hidden costs that can kind of lurk in the shadows. The lender may not call them prepayment penalties, but they in effect are. If you repay early, we waive all remaining fees. Not everyone does that. Some claim to, but you've paid so much in front-loaded fees that they remove incentives to repay early.
Any general advice for startups or more established small businesses?
Yes, the type of investments you're making will vary with where you are on your growth trajectory. If you're an early stage startup, you can sometimes take out loans, but if you need to make a large investment upfront, loans are not always the best solution because you usually need to repay the loan before you have enough revenue to do so. So, investors might be the way to go if you're a startup looking to make a big upfront investment before you monetize.
More established business that have healthy revenue and margins that can support debt should look at debt financing. Every business is different, so I can't offer blanket financial advice so these should just be questions business owners ask.
Fundbox makes capital available to businesses through business loans and lines of credit made by First Electronic Bank, a Utah chartered Industrial Bank, member FDIC, in addition to invoice-clearing advances, business loans and lines of credit made directly by Fundbox.