As you start earning, it is good practice to invest the money. Investments provide good financial security for the future. However, when there are so many different types of investments, it may be confusing. Today, let us learn about ETF, which is a simple means of investing to obtain good retains.
What is an ETF?
ETF stands for Exchange Traded Fund. Here, you can buy several bonds/stocks at the same time. An investor can buy shares of ETFs. The ETF share prices can fluctuate throughout the day. They are listed and traded on an exchange. ETFs hold multiple underlying assets.
ETFs offer good alternatives to individual stock picks. While services like Motley Fool make it easier for investors to choose stocks (read the full review here), many investors prefer the simplicity of ETF investing.
There are certain concepts to understand before you can invest in ETFs.
Expense ratio – The fee that ETFs charge is called the expense ratio. For beginners, it is recommended to go with smaller expense ratios.
Types of ETFs – There are two types of ETFs – passive ETFs and active ETFs. Passive ETFs (also called index funds) track an index and update the portfolio from time to time. If you are new to this, start with passive ETFs. In an active ETF, an investment manager manages the portfolio of securities.
Investing in ETFs
There are 2 ways to buy/sell an ETF. Three points to note before investing in an ETF –
Ensure that you have a Demat account. It is needed to hold the ETF units.
Open a broker account with a broker/sub-broker.
Complete your KYC. You will need documents for proof of identity, proof of address and your bank account details.
You can now use the registered bank account for your ETF investments. You will need the current price of a single share to start investing. Check whether your broker is registered with the stock exchange. Now, there are two ways to buy and sell ETF shares.
The first way is to call your broker. You can tell the broker about your trade specifications and buy/sell ETF units through the broker.
The second way is to use an online trading terminal. You can place your order on the terminal.
Why should one invest in ETFs?
ETFs are considered as the ideal investment for youngsters. This is because they provide a host of benefits. Some of the benefits are discussed below.
Reasonable transaction charges – Compared to other index-tracking products, you incur lesser transaction charges on ETFs
Diversification – Diversification is a mantra that the majority of investors swear by. With ETFs, you can spread the risk over several securities. Stock-specific risk is minimum in this case. In a single transaction, you are exposed to a variety of stocks, sectors and commodities
Liquidity – ETFs provide ample liquidity. They can be traded throughout the day. If you have limited capital, you can immediately exit a losing investment.
Tax-benefits – If you are an ETF investor, the dividends you gain are tax exempt. To sell an ETF unit within 12 months, a short term capital gain tax is levied.
ETFs have the potential to produce great investment growth over a long period.
The number of small businesses is the exact opposite of its size, which comprise the majority of businesses in the USA. According to the US Small Business Administration, small businesses account for 99.7% of all businesses in the USA, or a total of 28.8 million. These small businesses currently have 56.8 million employees and covers 48% of the total for USA.
The numbers speak the same with small business funding. Many financial institutions are taking advantage of the large market resulting in more small business funding solutions available. The same Small Business Administration (SBA) report said that there are about 5.2 million small business loans (valued at $ 73.6 billion) released by US lending firms in 2014.
The market for small business lending is robust, and one can always find a solution that can fit any need and preference. A business will always have the answer on why get a small business loan. Here are some of the available small business lending solutions, and what you need to know about them:
Conventional Bank Loans
This is usually the first option when it comes to any kind of financing, whether for personal or business purposes. Small businesses, however, find its loan eligibility hard to achieve, and its requirements difficult to secure. They also deploy stringent terms and compliance measures.
The reason why most businesses flock around banks is because the bank’s loans carry smaller interest rates and they can also be generous with the amount as long as the eligibility criteria have been met. The disadvantage would have to be its strict requirements and the need for a collateral.
Alternative Lending Firms
They appeal most small businesses because of lenient terms and flexible repayment options. It is also more convenient to secure alternative funding because most providers can process your application online. This is most especially valuable for emergency cash needs.
Another advantage in dealing with alternative lending firms is their lenient terms and eligibility criteria, a lower requirement for credit score, and its faster processing and approval. The downside, however, is the excessively high interest rates and other additional upfront fees.
A U.S. Small Business Administration (SBA) loan system is a funding solution backed up by the US government, which aims to support its citizens with the means to build and expand their own businesses. The SBA doesn’t provide the loan itself but serves as a guarantor to the loan coming from both private and public financial institutions that include banks and alternative lenders.
Small Business Administration partners with these financial institutions to offer a wide range of loan types that can suit the different funding needs of small businesses. It has a regulated set of guidelines, which all partners follow, in order to protect the interest of both the borrower and the lender. SBA guarantees for a percentage of the amount of every loan approved, which is about 70–90%. This minimizes the risk for the lender. On the other hand, the fact that a government small business loan is enough to know that the borrower is protected under its own laws and regulations. SBA loans offer lower interest rates than other alternative lending institutions.
The downside of an SBA loan is its long process, and it requires more paperwork. There are also top up fees to be paid when you avail.
Questions To Answer Before Getting an SBA Loan
Before approaching an SBA loan provider, make sure that you have the answer to the following questions:
What is your borrowing intent?
How urgent is your need?
What are your business’ risks?
In what stage of development is your business?
How much do you need?
How long can you pay the loan back?
What is your business plan?
How long have you been operating your business?
What is the cycle of your business? Is it seasonal or consistently producing revenue?
By answering the above questions, you can help the SBA loan provider to assess your capacity and risk tolerance. It can also determine if you are eligible or not.
Reasons Why You May Be Denied From an SBA Loan
Small Business Administration loans are attractive to small businesses because of its advantages like low interest rates, flexible repayment terms, varied loan types, and primarily because it is government backed-up. Most alternative fundings compensate the higher risk involved with their grants by imposing higher interest rates, which can go as high as 80% APR.
Unfortunately, not everybody that applies for it are automatically approved. Many businesses have varied problems with small business loans that can hinder their growth, and here are the most probable reasons why you may not be granted with an SBA Loan.
Yours Is a Startup Company
An SBA loan requires for a business to be operating for at least 2 years.
You may opt for other funding options like angel investing or to a venture capitalist. There is also an online community-based funding solution like crowdfunding, which can cater to start up entrepreneurs. Cash flow based funding like merchant cash advances is also viable. There are also alternative lending companies that specialize in giving capital for startups, but the grant is not that big.
Yours and Your Business’ Credit Score Is Low
Like with conventional bank loans, SBA loans require a strong credit score, which is the most prevalent reason why most borrowers get denied.
A credit score, which most people might probably doesn’t know, is the numerical equivalent of your commitment to paying off your debts. It is computed based on your debt and credit histories with banks and other financial institutions. For example, you own a credit card. When you use your card, you will be billed on a designated cut off. If you diligently pay on time and in full amount and you are consistent with this for a long period of time, then, generally, your credit score will be high. When you do the other way around, say you don’t pay the full amount or you pay late, of course, your score will be low. But having no credit history can equally hurt your credit score because basically, there will be no means for a lender to assess your willingness and responsibility to pay.
There may be a lot of reasons why a business, or you, have a low credit score, and other alternative lending agencies are not too particular with these. Find one that can grant a loan for someone like you, which is also an opportunity to build your credit score again.
You Do Not Have Enough Collateral
Small Business Administration loans like bank loans do require a collateral. This collateral is being shared with the lender and the SBA because they share a part of the guarantee with the loan. Because of this, it may also require you a personal collateral too. This is also the reason why SBA loans cannot cater to startups because most of them doesn’t have more assets that can serve as a collateral.
Your Company’s Industry Is Part of the Grant’s Exclusions
Aside from startups, SBA loans won’t approve the loan applications of businesses in these industries:
Businesses that are engaged in lending
Life insurance companies
Businesses outside the USA
Businesses engaged in networking or any incentive-based model and pyramiding
Businesses that get a third of its gross revenues from legal gambling
Lobbying or political organizations
Speculative businesses like oil explorations
You Don’t Want the Risk for a Personal Guarantee
Small Business Administration loans will need your personal guarantee, which meant your car, your home, and other personal assets. When you give this to the bank as a collateral, you give it the power to sell those when you cannot pay back your loan anymore.
There are other small business loan with no personal guarantee to ask from you, which may be viable if you are intolerant with this kind of risk.
So how to convince the best SBA loan providers to grant you that loan? You’ve got to be positive when it comes to these 5 C’s:
Character – this implies your managerial skills or the strength of your management team. Your team should exemplify a strong sense of responsibility when it comes to their roles in your business.
Credit Score – this is one important factor that SBA loan providers do look for, and it is also one of the hardest to repair. Even though you may be denied with an SBA loan, there is a lot of room in getting another small business loan provider that will fit your eligibility and needs.
Capacity – a strong business plan and a steady cash flow are strong indications of your capacity to sustain in paying your liabilities.
Capital – before getting an SBA loan, you should know how much additional capital you really need to finance your venture. This also includes information about the nature of your intent and the specific reason/plan for the grant.
Collateral – there are different assets that can serve as collaterals other than real estate like personal assets (house, car), accounts receivables, and credit cards. When the cash flow and profits are good, it is best to slowly build up your assets, which can also help you for your unexpected future additional funding needs.