How Bitcoin Disrupts the Finance Industry

How Bitcoin Disrupts the Finance Industry .

Cryptocurrencies and their underlying blockchain technology are being touted as the next-big-thing after the creation of the internet. One area where these technologies are likely to have a major impact is the financial sector. The blockchain, as a form of distributed ledger technology (DLT), has the potential to transform well-established financial institutions and bring lower costs, faster execution of transactions, improved transparency, auditability of operations, and other benefits. Cryptocurrencies hold the promise of a new native digital asset class without a central authority.

So what do these technological developments mean for the various players in the sector and end users? “Blockchains have the potential to displace any business activity built on transactions occurring on traditional corporate databases, which is what underlies nearly every financial service function. Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications. DLT is therefore both a great opportunity and also a disruptive threat,” according to Bruce Weber, dean of Lerner College and business administration professor, and Andrew Novocin, professor of electrical and computer engineering, both at the University of Delaware.

Earlier this year, Weber, Novocin, and graduate student Jonathan Wood conducted a literature review on cryptocurrencies and DLT for the SWIFT Institute. Based on this review, the SWIFT institute recently issued a grant to conduct new research on DLT and cryptocurrencies in the financial sector. Weber and Novocin noted that just as disruptors like Amazon, Google, Facebook and Uber built software platforms and thriving businesses thanks to the connectivity provided by internet standards, next-generation startups will build new services and businesses with blockchains. “Many pundits expect blockchain, as a distributed technology, to become the foundation for new services and applications that have completely different rules from those running on hierarchical and controlled databases. Cryptocurrencies are an early example but many others will follow,” they added.

Kartik Hosanagar, a Wharton professor of marketing and operations, information and decisions, pointed out that the financial services sector is full of intermediaries such as banks that help create trust among transacting parties like lenders and borrowers. Blockchain, he said, is a mechanism to create trust without centralized control. “The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”

Regarding cryptocurrencies, Hosanagar pointed out that most of the value today is tied to speculative buying rather than actual use cases. But having a currency without a central authority offers “certain unique kinds of protections especially in countries with troubled central banks.” For example, Venezuela’s currency is rapidly losing value. For people who stored their savings in crypto, there was greater protection against such rapid currency devaluations. “Of course, cryptocurrencies have their own instabilities, but they aren’t tied to actions by central banks and that’s particularly relevant in countries and economies where citizens don’t trust their governments and central banks,” he said.

“Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications.”–Bruce Weber and Andrew Novocin

Hosanagar expects the first wave of applications to be rolled out in “private” blockchains where a central authority such as a financial institution and its partners are the only ones with the permission to participate (as opposed to public, permissionless blockchains where participants are anonymous and there is no central authority). Applications in the private blockchains, he said, will be more secure and will offer some of the benefits of decentralized ledgers but will not be radically different from the way things work at present. However, over time, he expects smart contracts (self-executing contracts when requirements are met) to be offered on public blockchain networks like Ethereum. “When securities are traded, intermediaries provide trust, and they charge commissions. Blockchains can help provide such trust in a low-cost manner. But trade of securities is governed by securities laws. Smart contracts offer a way to ensure compliance with the laws. They have great potential because of their ability to reduce costs while being compliant,” says Hosanagar.

According to Weber and Novocin, one area ripe for transformation is reaching consensus on important benchmark rates and prices. At present, they point out, different proprietary indexes are used to determine interest rates and the price of many mainstream assets. Blockchain can transform this. “Think of the London Interbank Offered Rate (LIBOR) and the recent scandals involving manipulation of benchmark values when they are controlled by a single entity that may not be capable of detecting false or fraudulent data. Blockchain could provide greater transparency around the process of creating agreed upon reference prices, and allow more people to participate in the consensus process.”

Weber and Novocin expect that in some areas intermediaries will find their roles reduced as blockchain allows for automation through greater transparency and traceability. In other areas, intermediaries will find themselves well-placed to take advantage of changing needs of their clients, as firms will need help to manage the shift to new standards as well as the greater complexity of open and traceable blockchain infrastructure. Intermediaries in areas that could potentially be disrupted, they said, “should get involved with projects seeking to set the standards, so that they can stay informed and position themselves to profit from becoming the leaders in the operations of the new markets that will emerge.”

Kevin Werbach, Wharton professor of legal studies and business ethics, and author of a forthcoming book The Blockchain and the New Architecture of Trust,  said that it’s usually not helpful to focus on what aspects of a major existing market will be “transformed” or “disrupted” by new technologies. Important technologies, he said, are far more likely to be integrated into the system than replace it. According to Werbach, while some firms will fail to make the transition and some new ones will take hold, “over the long-run, virtually every historic innovation that eliminated some forms of intermediation also created new forms.”

Blockchain will reduce the massive duplication of information that creates delays, conflicts and confusion in many aspects of financial services, Werbach added. For example, when a syndicate of lenders participates in a loan, having one shared ledger means they don’t all need to keep track of it independently. International payments and corporate stock records are other examples where there are huge inefficiencies due to duplicate record-keeping and intermediaries. “End users won’t see the changes in the deep plumbing of financial services, but it will allow new service providers to emerge and new products to be offered,” said Werbach.

Bumps Along the Way

Angela Walch, professor of law at St. Mary’s University School of Law and a research fellow at the Centre for Blockchain Technologies at University College London, offered another perspective. She said there is a lot of excitement about blockchain as a distributed ledger technology for the financial sector because many believe that it offers a better, more efficient and more resilient form of recordkeeping. However, making use of the blockchain is not as simple as just buying new software and running it. “Blockchain technology is, at core, group recordkeeping. To reap its full benefits, one needs all the relevant members of the group to join the system. This requires collaboration with and across businesses, which is a potentially big hurdle, and may be the hurdle that most limits adoption.”

Governance is the biggest challenge in decentralized organizations, said Weber and Novocin. Members participating in a blockchain-supported financial function may have misaligned incentives, and can end up in gridlock, or with a chaotic outcome. They cite the example of the ‘DAO Hack,’ which was the first prominent smart contract project on the Ethereum network to suffer a large loss of funds. The Ethereum community voted to conduct a hard fork (a radical change to the protocol that makes previously invalid blocks/transactions valid or vice-versa) — reversing the transactions after the hack and essentially refunding the DAO investors. This was in effect a breach of Ethereum’s immutability and it left a sizeable minority of the community bitterly dissatisfied. This group viewed the Ethereum community as forsaking its commitment to immutable, permanent records. They refused to acknowledge the hard fork, and maintained the original Ethereum blockchain, now known as Ethereum Classic (whereas the forked version supported by the Ethereum Foundation is simply Ethereum).

“The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”–Kartik Hosanagar

“Distributed organizations serving an open community need to take care to design their governance systems, incentive structures and decision-making processes to create consensus without unduly slowing down the decision-making,” said Weber and Novocin. “Scenario planning or war gaming are worth exploring at the beginning of blockchain projects. Forward planning enables organizations to swiftly respond in a predictable way that is supportive of stakeholders. Publicizing these plans in advance can also build trust and user confidence.”

Cryptocurrency Risks.

Werbach listed a variety of risks and vulnerabilities related to cryptocurrencies: Bitcoin has shown that the fundamental security of its proof-of-work system is sound, but it has major limitations such as limited scalability, massive energy usage and concentration of mining pools. There has been massive theft of cryptocurrencies from the centralized intermediaries that most people use to hold it, and massive fraud by promoters of initial coin offerings and other schemes. Manipulation is widespread on lightly-regulated cryptocurrency exchanges.

For example, roughly half of Bitcoin transactions are with Tether, a “stablecoin” that claims to be backed by U.S. dollars but has never been audited and is involved in highly suspicious behavior. Money laundering and other criminal activity is a serious problem if transactions do not require some check of real-world identities. “There are major efforts to address all of these risks and vulnerabilities. Some are technical, some are business opportunities, and some are regulatory questions. There must be recognition among cryptocurrency proponents that maturation of the industry will require cooperation in many cases with incumbents and regulators,” added Werbach.

Hosanagar cautions that while decentralization offers significant value — and a significant number of miners/validators must verify the transaction for it to be validated — it is still susceptible to collusion. If one or a few companies running lots of miners/validators in a small network collude, they can affect the sanctity of the network. The big risk with cryptocurrencies, he added, is that most activity as of today is ultimately tied to speculation. It’s important for cryptocurrencies to discover a “killer app soon so there is some underlying value created beyond speculation of its future value,” Hosanagar concludes.

The Way Ahead?

Given all these challenges, what is the current mindset in the financial sector towards adopting these new technologies? And, importantly, should one push for wide acceptance and deployment, or is there need for them to stabilize first?

According to Werbach, “It’s not an either-or” choice. Cryptocurrencies and blockchain technology in general, he noted, are immature currently. However, there are some areas where they are already able to be deployed effectively. The best way to work through today’s problems, is “to build working systems and see where difficulties arise,” Werbach said. Looking ahead, integration with law, regulation and governance will be critical. Blockchain and cryptocurrencies represent a new form of trust, he added. They will only succeed if they become sufficiently trustworthy, beyond the basic security of the distributed ledgers. “Law, regulation and governance are three major mechanisms to produce trustworthy systems that scale up to society-wide adoption. We need to find ways to address the legitimate concerns of governments without overly restricting the innovations that blockchain technology enables. I’m optimistic about that process over time.”

“We need to find ways to address the legitimate concerns of governments without overly restricting the innovations that blockchain technology enables.”–Kevin Werbach

Walch noted that while there are claims that some consortia are putting ‘blockchain’ systems into production, in many cases it appears that what they are calling a blockchain bears little to no resemblance to the original blockchain technology behind Bitcoin. In many instances, she said, existing shared databases are being called ‘blockchain’ for marketing purposes. “If people do use something they call DLT or blockchain technology in important financial systems, my hope is that they make the decision based on actual capabilities of the tech rather than its widely hyped and generally overstated capabilities,” Walch said. “Permissioned blockchains, which are the variation most likely to be used for financial systems recordkeeping, are very different from public blockchains like Bitcoin or Ethereum. I hope that a more modest and accurate understanding of the actual characteristics of permissioned blockchains sinks in before they are widely adopted.”

Regarding cryptocurrencies or cryptoassets, Walch said that the financial sector’s interest is “less about recordkeeping and more about a new financial asset that it can make money off of.” She pointed out that at present there is no clarity on how power and accountability work in these systems. The ongoing operation of crypto systems and the value they embed and support is reliant on the competence of, and ethical behavior by, unaccountable software developers and validators. “The financial sector believes it understands and can manage the risks of cryptoassets, but I am less certain and worry that hubris and greed are driving the push to create cryptoassets as a real asset class. This has been a bad mixture in the past,” says Walch. “I think it would be more responsible to let cryptosystems exist on their own for a while longer to let more of the kinks get worked out — if they can be; I’m not sure the governance ones can — rather than to rapidly integrate them into the financial system as we seem to be doing.”

“I … worry that hubris and greed are driving the push to create cryptoassets as a real asset class.”–Angela Walch

Conversely, Weber and Novocin feel that the financial industry is cautious about the new DLT technology. According to them, to build confidence in new blockchain systems there needs to be transparency around how the processes work and what the benefits are, and in order to secure adoption, they need to be straightforward to use. “Pundits have drawn parallels to the open source Linux operating system. Although only a few individuals use Linux directly, it quietly runs the vast majority of servers and cloud processors across the world. Similarly, early adoption of blockchain will likely happen in the background of business processes. Companies should get involved now, even if it is just to experiment with the concepts. By gaining familiarity with these new tools, they will be ready as the space continues to develop.”

Weber and Novocin expect that in the next few years, many more businesses will implement private blockchains to improve the transparency and traceability of their financial operations, supply chains, inventory management systems and other internal business systems. Clearer standards will be adopted and a few high-profile projects will emerge. Meanwhile, they said, R&D will continue among the many decentralized blockchain projects to invent more scalable public ledgers whether it be blockchain, Tangle, Hashgraph or something new. “Work is needed on better and more efficient consensus models, whether it be a new form of proof-of-stake or proof-of-work, or something else. There are many established groups, startups, companies and research teams that organizations can join, partner with, or support in order to contribute to research and expand their capabilities.”




Bitcoin (Currency),Bitcoin,Finance (Industry),Industry (Organization Sector),Brad Templeton,Singularity University,Innovation,Internet,Web,Website,Google,Disruption,Technology,Technological,Money,Currency,Gold,Big Think,BigThink,BigThink.com,Education,Educational,Lifelong Learning,EDU

July 16, 2020

How the Blockchain Will Impact the Financial Sector

How the Blockchain Will Impact the Financial Sector.

Cryptocurrencies and their underlying blockchain technology are being touted as the next-big-thing after the creation of the internet. One area where these technologies are likely to have a major impact is the financial sector. The blockchain, as a form of distributed ledger technology (DLT), has the potential to transform well-established financial institutions and bring lower costs, faster execution of transactions, improved transparency, auditability of operations, and other benefits. Cryptocurrencies hold the promise of a new native digital asset class without a central authority.

So what do these technological developments mean for the various players in the sector and end users? “Blockchains have the potential to displace any business activity built on transactions occurring on traditional corporate databases, which is what underlies nearly every financial service function. Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications. DLT is therefore both a great opportunity and also a disruptive threat,” according to Bruce Weber, dean of Lerner College and business administration professor, and Andrew Novocin, professor of electrical and computer engineering, both at the University of Delaware.

Earlier this year, Weber, Novocin, and graduate student Jonathan Wood conducted a literature review on cryptocurrencies and DLT for the SWIFT Institute. Based on this review, the SWIFT institute recently issued a grant to conduct new research on DLT and cryptocurrencies in the financial sector. Weber and Novocin noted that just as disruptors like Amazon, Google, Facebook and Uber built software platforms and thriving businesses thanks to the connectivity provided by internet standards, next-generation startups will build new services and businesses with blockchains. “Many pundits expect blockchain, as a distributed technology, to become the foundation for new services and applications that have completely different rules from those running on hierarchical and controlled databases. Cryptocurrencies are an early example but many others will follow,” they added.

Kartik Hosanagar, a Wharton professor of marketing and operations, information and decisions, pointed out that the financial services sector is full of intermediaries such as banks that help create trust among transacting parties like lenders and borrowers. Blockchain, he said, is a mechanism to create trust without centralized control. “The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”

Regarding cryptocurrencies, Hosanagar pointed out that most of the value today is tied to speculative buying rather than actual use cases. But having a currency without a central authority offers “certain unique kinds of protections especially in countries with troubled central banks.” For example, Venezuela’s currency is rapidly losing value. For people who stored their savings in crypto, there was greater protection against such rapid currency devaluations. “Of course, cryptocurrencies have their own instabilities, but they aren’t tied to actions by central banks and that’s particularly relevant in countries and economies where citizens don’t trust their governments and central banks,” he said.

“Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications.”–Bruce Weber and Andrew Novocin

Hosanagar expects the first wave of applications to be rolled out in “private” blockchains where a central authority such as a financial institution and its partners are the only ones with the permission to participate (as opposed to public, permissionless blockchains where participants are anonymous and there is no central authority). Applications in the private blockchains, he said, will be more secure and will offer some of the benefits of decentralized ledgers but will not be radically different from the way things work at present. However, over time, he expects smart contracts (self-executing contracts when requirements are met) to be offered on public blockchain networks like Ethereum. “When securities are traded, intermediaries provide trust, and they charge commissions. Blockchains can help provide such trust in a low-cost manner. But trade of securities is governed by securities laws. Smart contracts offer a way to ensure compliance with the laws. They have great potential because of their ability to reduce costs while being compliant,” says Hosanagar.

According to Weber and Novocin, one area ripe for transformation is reaching consensus on important benchmark rates and prices. At present, they point out, different proprietary indexes are used to determine interest rates and the price of many mainstream assets. Blockchain can transform this. “Think of the London Interbank Offered Rate (LIBOR) and the recent scandals involving manipulation of benchmark values when they are controlled by a single entity that may not be capable of detecting false or fraudulent data. Blockchain could provide greater transparency around the process of creating agreed upon reference prices, and allow more people to participate in the consensus process.”

Weber and Novocin expect that in some areas intermediaries will find their roles reduced as blockchain allows for automation through greater transparency and traceability. In other areas, intermediaries will find themselves well-placed to take advantage of changing needs of their clients, as firms will need help to manage the shift to new standards as well as the greater complexity of open and traceable blockchain infrastructure. Intermediaries in areas that could potentially be disrupted, they said, “should get involved with projects seeking to set the standards, so that they can stay informed and position themselves to profit from becoming the leaders in the operations of the new markets that will emerge.”

Kevin Werbach, Wharton professor of legal studies and business ethics, and author of a forthcoming book The Blockchain and the New Architecture of Trust,  said that it’s usually not helpful to focus on what aspects of a major existing market will be “transformed” or “disrupted” by new technologies. Important technologies, he said, are far more likely to be integrated into the system than replace it. According to Werbach, while some firms will fail to make the transition and some new ones will take hold, “over the long-run, virtually every historic innovation that eliminated some forms of intermediation also created new forms.”


Blockchain will reduce the massive duplication of information that creates delays, conflicts and confusion in many aspects of financial services, Werbach added. For example, when a syndicate of lenders participates in a loan, having one shared ledger means they don’t all need to keep track of it independently. International payments and corporate stock records are other examples where there are huge inefficiencies due to duplicate record-keeping and intermediaries. “End users won’t see the changes in the deep plumbing of financial services, but it will allow new service providers to emerge and new products to be offered,” said Werbach.

Bumps Along the Way

Angela Walch, professor of law at St. Mary’s University School of Law and a research fellow at the Centre for Blockchain Technologies at University College London, offered another perspective. She said there is a lot of excitement about blockchain as a distributed ledger technology for the financial sector because many believe that it offers a better, more efficient and more resilient form of recordkeeping. However, making use of the blockchain is not as simple as just buying new software and running it. “Blockchain technology is, at core, group recordkeeping. To reap its full benefits, one needs all the relevant members of the group to join the system. This requires collaboration with and across businesses, which is a potentially big hurdle, and may be the hurdle that most limits adoption.”

Governance is the biggest challenge in decentralized organizations, said Weber and Novocin. Members participating in a blockchain-supported financial function may have misaligned incentives, and can end up in gridlock, or with a chaotic outcome. They cite the example of the ‘DAO Hack,’ which was the first prominent smart contract project on the Ethereum network to suffer a large loss of funds. The Ethereum community voted to conduct a hard fork (a radical change to the protocol that makes previously invalid blocks/transactions valid or vice-versa) — reversing the transactions after the hack and essentially refunding the DAO investors. This was in effect a breach of Ethereum’s immutability and it left a sizeable minority of the community bitterly dissatisfied. This group viewed the Ethereum community as forsaking its commitment to immutable, permanent records. They refused to acknowledge the hard fork, and maintained the original Ethereum blockchain, now known as Ethereum Classic (whereas the forked version supported by the Ethereum Foundation is simply Ethereum).

“The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”–Kartik Hosanagar

“Distributed organizations serving an open community need to take care to design their governance systems, incentive structures and decision-making processes to create consensus without unduly slowing down the decision-making,” said Weber and Novocin. “Scenario planning or war gaming are worth exploring at the beginning of blockchain projects. Forward planning enables organizations to swiftly respond in a predictable way that is supportive of stakeholders. Publicizing these plans in advance can also build trust and user confidence.”

Cryptocurrency Risks.

Werbach listed a variety of risks and vulnerabilities related to cryptocurrencies: Bitcoin has shown that the fundamental security of its proof-of-work system is sound, but it has major limitations such as limited scalability, massive energy usage and concentration of mining pools. There has been massive theft of cryptocurrencies from the centralized intermediaries that most people use to hold it, and massive fraud by promoters of initial coin offerings and other schemes. Manipulation is widespread on lightly-regulated cryptocurrency exchanges.

For example, roughly half of Bitcoin transactions are with Tether, a “stablecoin” that claims to be backed by U.S. dollars but has never been audited and is involved in highly suspicious behavior. Money laundering and other criminal activity is a serious problem if transactions do not require some check of real-world identities. “There are major efforts to address all of these risks and vulnerabilities. Some are technical, some are business opportunities, and some are regulatory questions. There must be recognition among cryptocurrency proponents that maturation of the industry will require cooperation in many cases with incumbents and regulators,” added Werbach.

Hosanagar cautions that while decentralization offers significant value — and a significant number of miners/validators must verify the transaction for it to be validated — it is still susceptible to collusion. If one or a few companies running lots of miners/validators in a small network collude, they can affect the sanctity of the network. The big risk with cryptocurrencies, he added, is that most activity as of today is ultimately tied to speculation. It’s important for cryptocurrencies to discover a “killer app soon so there is some underlying value created beyond speculation of its future value,” Hosanagar concludes.

The Way Ahead?

Given all these challenges, what is the current mindset in the financial sector towards adopting these new technologies? And, importantly, should one push for wide acceptance and deployment, or is there need for them to stabilize first?

According to Werbach, “It’s not an either-or” choice. Cryptocurrencies and blockchain technology in general, he noted, are immature currently. However, there are some areas where they are already able to be deployed effectively. The best way to work through today’s problems, is “to build working systems and see where difficulties arise,” Werbach said. Looking ahead, integration with law, regulation and governance will be critical. Blockchain and cryptocurrencies represent a new form of trust, he added. They will only succeed if they become sufficiently trustworthy, beyond the basic security of the distributed ledgers. “Law, regulation and governance are three major mechanisms to produce trustworthy systems that scale up to society-wide adoption. We need to find ways to address the legitimate concerns of governments without overly restricting the innovations that blockchain technology enables. I’m optimistic about that process over time.”

“We need to find ways to address the legitimate concerns of governments without overly restricting the innovations that blockchain technology enables.”–Kevin Werbach

Walch noted that while there are claims that some consortia are putting ‘blockchain’ systems into production, in many cases it appears that what they are calling a blockchain bears little to no resemblance to the original blockchain technology behind Bitcoin. In many instances, she said, existing shared databases are being called ‘blockchain’ for marketing purposes. “If people do use something they call DLT or blockchain technology in important financial systems, my hope is that they make the decision based on actual capabilities of the tech rather than its widely hyped and generally overstated capabilities,” Walch said. “Permissioned blockchains, which are the variation most likely to be used for financial systems recordkeeping, are very different from public blockchains like Bitcoin or Ethereum. I hope that a more modest and accurate understanding of the actual characteristics of permissioned blockchains sinks in before they are widely adopted.”

Regarding cryptocurrencies or cryptoassets, Walch said that the financial sector’s interest is “less about recordkeeping and more about a new financial asset that it can make money off of.” She pointed out that at present there is no clarity on how power and accountability work in these systems. The ongoing operation of crypto systems and the value they embed and support is reliant on the competence of, and ethical behavior by, unaccountable software developers and validators. “The financial sector believes it understands and can manage the risks of cryptoassets, but I am less certain and worry that hubris and greed are driving the push to create cryptoassets as a real asset class. This has been a bad mixture in the past,” says Walch. “I think it would be more responsible to let cryptosystems exist on their own for a while longer to let more of the kinks get worked out — if they can be; I’m not sure the governance ones can — rather than to rapidly integrate them into the financial system as we seem to be doing.”

“I … worry that hubris and greed are driving the push to create cryptoassets as a real asset class.”–Angela Walch

Conversely, Weber and Novocin feel that the financial industry is cautious about the new DLT technology. According to them, to build confidence in new blockchain systems there needs to be transparency around how the processes work and what the benefits are, and in order to secure adoption, they need to be straightforward to use. “Pundits have drawn parallels to the open source Linux operating system. Although only a few individuals use Linux directly, it quietly runs the vast majority of servers and cloud processors across the world. Similarly, early adoption of blockchain will likely happen in the background of business processes. Companies should get involved now, even if it is just to experiment with the concepts. By gaining familiarity with these new tools, they will be ready as the space continues to develop.”

Weber and Novocin expect that in the next few years, many more businesses will implement private blockchains to improve the transparency and traceability of their financial operations, supply chains, inventory management systems and other internal business systems. Clearer standards will be adopted and a few high-profile projects will emerge. Meanwhile, they said, R&D will continue among the many decentralized blockchain projects to invent more scalable public ledgers whether it be blockchain, Tangle, Hashgraph or something new. “Work is needed on better and more efficient consensus models, whether it be a new form of proof-of-stake or proof-of-work, or something else. There are many established groups, startups, companies and research teams that organizations can join, partner with, or support in order to contribute to research and expand their capabilities.”




Bitcoin (Currency),Bitcoin,Finance (Industry),Industry (Organization Sector),Brad Templeton,Singularity University,Innovation,Internet,Web,Website,Google,Disruption,Technology,Technological,Money,Currency,Gold,Big Think,BigThink,BigThink.com,Education,Educational,Lifelong Learning,EDU

July 16, 2020

How to Choose Business Financing

How to Choose Business Financing.

Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.



Method 1 Arranging for a Loan.

1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.

Equity capital is the current market value of everything the company owns less any liabilities owed by the company.

Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.

2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.

To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.

Annual reviews are required to maintain your line of credit.

3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.

Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.

Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.

Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.

Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.

4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.

Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.

5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.

SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.

SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.

Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.

Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.

Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).

6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.

Each agency has its own application process. However many require the same basic documentation. Gather the following information.

A loan application form that details why you are applying for the loan and how you will use the money.

Your resume gives lenders information about your expertise in the field.

All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.

Your business credit report gives lenders information about your credit worthiness.

Be prepared to submit your business and personal tax returns for the past three years.

Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.

Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.

You may need to put up collateral, especially if you cannot provide strong financial statements.

Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.

7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.

Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.



Method 2 Applying for Grants.

1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.

2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.

SBA grants for non-profits are announced on grants.gov.

Businesses qualifying for specific initiative grants authorized by Congress will be notified.

U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.

3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.

4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.

Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.

Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.

Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.

Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.



Method 3 Finding Investors.

1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.

2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.

Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.

Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).

3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.

According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).

Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.

Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.

Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.

4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.

February 10, 2020

how to choose business financing

How to Choose Business Financing.

Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.



Method 1 Arranging for a Loan.

1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.

Equity capital is the current market value of everything the company owns less any liabilities owed by the company.

Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.

2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.

To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.

Annual reviews are required to maintain your line of credit.

3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.

Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.

Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.

Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.

Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.

4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.

Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.

5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.

SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.

SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.

Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.

Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.

Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).

6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.

Each agency has its own application process. However many require the same basic documentation. Gather the following information.

A loan application form that details why you are applying for the loan and how you will use the money.

Your resume gives lenders information about your expertise in the field.

All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.

Your business credit report gives lenders information about your credit worthiness.

Be prepared to submit your business and personal tax returns for the past three years.

Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.

Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.

You may need to put up collateral, especially if you cannot provide strong financial statements.

Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.

7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.

Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.



Method 2 Applying for Grants.

1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.

2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.

SBA grants for non-profits are announced on grants.gov.

Businesses qualifying for specific initiative grants authorized by Congress will be notified.

U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.

3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.

4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.

Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.

Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.

Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.

Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.



Method 3 Finding Investors.

1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.

2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.

Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.

Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).

3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.

According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).

Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.

Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.

Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.

4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.

February 09, 2020

How to Choose Business Financing.

How to Choose Business Financing.

Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.

Method 1 Arranging for a Loan.

1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.

Equity capital is the current market value of everything the company owns less any liabilities owed by the company.

Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.

2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.

To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.

Annual reviews are required to maintain your line of credit.

3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.

Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.

Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.

Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.

Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.

4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.

Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.

5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.

SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.

SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.

Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.

Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.

Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).

6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.

Each agency has its own application process. However many require the same basic documentation. Gather the following information.

A loan application form that details why you are applying for the loan and how you will use the money.

Your resume gives lenders information about your expertise in the field.

All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.

Your business credit report gives lenders information about your credit worthiness.

Be prepared to submit your business and personal tax returns for the past three years.

Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.

Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.

You may need to put up collateral, especially if you cannot provide strong financial statements.

Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.

7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.

Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.

Method 2 Applying for Grants.

1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.

2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.

SBA grants for non-profits are announced on grants.gov.

Businesses qualifying for specific initiative grants authorized by Congress will be notified.

U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.

3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.

4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.

Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.

Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.

Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.

Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.[15]

Method 3 Finding Investors.

1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.

2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.

Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.

Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).

3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.

According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).

Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.

Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.

Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.

4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.

December 19, 2019

how to choose business financing

How to Choose Business Financing.

Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.

Method 1 Arranging for a Loan.

1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.

Equity capital is the current market value of everything the company owns less any liabilities owed by the company.

Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.

2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.

To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.

Annual reviews are required to maintain your line of credit.

3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.

Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.

Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.

Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.

Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.

4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.

Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.

5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.

SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.

SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.

Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.

Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.

Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).

6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.

Each agency has its own application process. However many require the same basic documentation. Gather the following information.

A loan application form that details why you are applying for the loan and how you will use the money.

Your resume gives lenders information about your expertise in the field.

All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.

Your business credit report gives lenders information about your credit worthiness.

Be prepared to submit your business and personal tax returns for the past three years.

Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.

Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.

You may need to put up collateral, especially if you cannot provide strong financial statements.

Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.

7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.

Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.

Method 2 Applying for Grants.

1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.

2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.

SBA grants for non-profits are announced on grants.gov.

Businesses qualifying for specific initiative grants authorized by Congress will be notified.

U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.

3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.

4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.

Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.

Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.

Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.

Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.[15]

Method 3 Finding Investors.

1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.

2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.

Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.

Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).

3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.

According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).

Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.

Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.

Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.

4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.

December 18, 2019

How to Finance a Franchise

How to Finance a Franchise.

A franchise is a business for which a person is licensed by a large company to operate under its name. As a franchise licensee, you operate a business and, in some cases, a brick-and-mortar location. Even without a physical storefront, starting a franchise requires a fair amount of money. There are several ways to finance a franchise. In addition to using your savings and leveraging your existing assets, there are loans and grants available from many sources. You may need to utilize more than one of the following methods to raise enough capital to start your business.

Part 1 Arranging Financing with the Franchisor.

1. Find out what financing your franchisor offers. The place most franchise licensees will start looking for financing is with the franchisor company itself. Many offer loans through their own finance companies or third party financiers they have business relationships with. This will often cover a significant portion of your startup costs.

Franchisors may also have agreements already set up with companies that can lease you some of the equipment you need to get the franchise up and running.

Each franchise has it's own package in terms of what it will offer new franchise licensees. Check into what your company offers.

This information may be available online or in other documents provided with your franchise application, or you may need to request it.

2. Look into down-payment and collateral requirements. Franchisors will require you to demonstrate that you have some collateral that will allow them to recoup their money, should your franchise fail. Many also require that you put up a down-payment of money that you have NOT borrowed from other sources.

McDonalds, for example, typically requires new franchise licensees to pay 25% of the costs of a franchise out of pocket, in cash. This ensures that franchises only go to people who have the necessary resources to make payments.

3. Apply for financing. Complete the necessary forms to apply for financing from the franchisor. Again, these will vary based on the company. Information about how to apply for financing may be included in the Franchise Disclosure Statement, or you may need to request it from the company.

The Franchise Disclosure Statement is a document you will receive from the company if your franchise application is approved. It spells out in minute detail the specifics of the franchise agreement. It is mandated by the Federal Trade Commission that all franchisors provide this document to licensees.

Like any other loan application, you will be expected to provide information about your assets, financial history, and net worth.

Part 2 Securing Outside Financing.

1. Apply for a bank loan. Another option consider for financing your new franchise is a standard small business loan from a bank. Especially if you have a good credit rating and are opening a franchise with a positive reputation, banks may be willing to offer you some starting capital.

Typically bank loans of this sort will require you to put up some kind of collateral, such as your home or any stocks or bonds you might own. They will also often want you to pay for as much as 20% of the cost of starting the franchise from your own money, to be certain you are capable of covering major business costs.

These loans usually require you to have already established a relationship with a banker.

2. Apply for an SBA loan. If your bank won't provide you with a loan, you may be able to secure a loan through the US Small Business Administration. These loans are disbursed by banks and credit unions, but are guaranteed against default by the federal government.

SBA loan 7(a) is available to franchise licensees opening any business on the SBA's franchise registry.

You can borrow between a couple hundred thousand and a few million dollars through the SBA. These loans typically have a five-year maturity period, so they work well for startup costs, but not longer-term expenses.

The International Franchise Association provides a directory on their website of vendors that administer SBA loans. The process of applying for an SBA loan, however, is a highly complicated one. Thus, it is usually recommended that applicants secure assistance from an accountant. If you don't have an accountant, your franchisor may be able to suggest someone.

3. Apply for a finance company loan. A recent development in the world of franchise financing is the online loan portal. These are websites that match franchise licensees with private creditors.

Two of the biggest online loan portals are Boefly and Franchise America Finance.

Some franchisors have have relationships with these companies. Ask your franchisor if they subscribe to any of these website.

4. Find investors or business partners. Another option for financing is look for a business partner to share the cost (and profits) of your new franchise. Many franchise licensees also turn to friends or family to borrow money or ask them to invest in the business.

Several small loans from friends or family members, to whom you promise to pay some mutually agreeable interest rate or equity in the business, can go far to cover the costs of starting a new franchise.

Equity means that your investors will be entitled to a share of the profits from the business and have a certain measure of control over its operations (depending on your agreement with them).

However, equity does not have to be repaid (unlike a loan).

You can also advertise in the local press seeking an investor or business partner. However, advertising for investors can be tricky, due to securities laws regulating the solicitation of public investors. Hire a financial lawyer to make sure you are staying on the right side of the law.

Be sure to draw up a formal agreement about the terms of the investment (i.e. how much they are investing, what interest rate you will pay, and over what period you will pay back the loan). This is especially important if you have investors who you don't know well.

Obtaining investment in this way will require accepting investments under the Securities and Exchange Commission's (SEC) Regulation D and the creation of official offering documents that detail the investment in a specific format.

If you are using Regulation D, be sure to hire a financial attorney to guide you through the process. Otherwise, you open yourself up to financial and criminal penalties resulting from violations of SEC regulations.

Part 3 Using Your Own Assets.

1. Use savings and other assets. Most franchise licensees end up covering at least a portion of the startup costs from their own resources. An obvious place to start is with your own cash savings.

Don't go overboard on this. A good rule of thumb is not to invest more than 75 percent of your cash reserves. That way, if an unexpected expense comes up, you have some money to cover it.

2. Borrow against your home. Many people starting a new business will borrow money based on the value of their home to get the business started. Money borrowed on the value of your home is tax-free. There are two ways to do this.

You can get a line of credit based on the value of your home. This is known as a home equity line of credit (HELOC) and is best for when you are unsure of how much money you will need, as the line of credit structure allows you to borrow as needed.

You can take out a second mortgage on the house. This will provide you with a set amount of money that must be repaid as a regular mortgage would.

Be warned that with either of these options, if you find yourself unable to make payments on the money borrowed, you could lose your home.

3. Use your retirement fund. Another common approach to self-financing is to use funds in your retirement account.[16] IRAs and 401(k) plans can be withdrawn from to finance all or part of a franchise business. However, there may be significant fees and taxes involved, depending on the plan type.

If you withdraw these funds as cash, you'll lose a significant chunk in taxes. There may be ways to avoid doing so, but you should seek professional legal and tax help when attempting them due to the complexity and possible negative consequences.

Taking funds out a traditional IRA or 401(k) before the age of 59.5 will result in a 10 percent penalty being assess on the withdrawal. This is in addition to the income taxes assessed on the withdrawal.

So, if you withdraw $100,000 and you are in the 25 percent marginal tax bracket, you would pay a total of 35 percent ($35,000) on your withdrawal, leaving you with only $65,000 for your business.

Withdrawals from a Roth IRA, however, are tax and penalty-free, provided they consist of contributions that have been in the account longer than five years.

Be warned, however, that if your new business fails, your retirement funds will be wiped out.

Part 4 Refinancing Your Franchise.

1.Decide when to refinance. Refinancing is taking on a new loan which pays off any old loans you already have. Most commonly, this is done to reduce interest payments, but could also be an opportunity to borrow additional funds and consolidate that loan with existing ones. You should consider refinancing if.

You can get a loan at a better interest rate.

You want to consolidate multiple loans into a single payment.

You want to change from and adjustable to fixed rate of interest, or vice versa.

You need more capital to update equipment, make improvements, or open an additional location.

2. Look into refinancing options. It is a good idea to frequently look for loans that will offer more favorable terms than the one(s) you already have. This can significantly reduce your interest payments and free up capital for other uses.

Once you've been in business for a while, you may become a more attractive customer to banks and other financiers. This is because over time, you demonstrate your ability to successfully run your franchise. This makes you a less risky investment. That, in turn, can lead to offers with better rates.

Check with your bank, and re-examine the option of an SBA loan, as this is often the least costly option for people who can get one.

3. Weigh the fees against the savings. Refinancing isn't free. There are usually fees, such as closing costs, involved in refinancing any loan.

There may be other penalties as well, based on the details of your old loan.

The question to ask is whether the savings outweigh the fees, time, and effort that go into refinancing. You may find that you can refinance and save a thousand dollars over the life of the loan. You'll need to decide if that's worth the time and effort. Your answer might be very different if you could save ten thousand dollars.

4. Update your business plan. Before applying for a new loan, update your business plan to reflect the current state of your business and your goals for the future. Your new business plan should include.

Strengths and weaknesses of your business.

Major milestones or accomplishments.

Expertise you have developed in running the franchise.

Goals for the next two to five years.

Two years of tax returns.

The payment schedule of your current loan.

5. Apply for a new a loan and pay off the old one. Fill out an application for the new loan. When you receive the funds, pay off the old loan.

Typically, the bank will handle the payoff for you. They will pay off your old loan, and billing will come from the new loan company from then on.

You may be able to refinance with a lender you already have loans from. This can save time and effort and sometimes mean less fees.

Tips.

Be sure to have any investment agreements reviewed by a legal professional prior to accepting money from investors, especially if they are people you don't know well.

Warnings.

It is not advisable to invest money set aside for specific important purposes (such as your children's college fund) in your franchise. As confident as you may be in its success, businesses fail every day. If that happens, there will be no way to recover your money.

Never use money from new investors to pay previous investors. Doing so could inadvertently turn your legitimate attempt to finance a franchise into an illegal investment scheme.

December 03, 2019