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Tag: Debt / Loans / Refinancing

  • How to Choose the Right Debt Provider for Your Business

    How to Choose the Right Debt Provider for Your Business

    Opinions expressed by Entrepreneur contributors are their own.

    When founders think of raising debt, they often imagine going to a bank. In my three years advising companies on debt financing options, I frequently remind founders that banks are certainly an option — but not the only one. Founders exploring debt should familiarize themselves with all of the options in the market, from traditional asset-based loans to more innovative venture debt and revenue-based financing solutions.

    These various lenders don’t just have distinctive structures and terms for their capital, they also each have a particular set of criteria to qualify for a loan. By acquainting yourself with the entire market upfront, you can focus on the lenders that suit your business the best, maximize the number of term sheets you receive and spend less time chasing dead ends.

    Related: Why Founders Should Embrace Debt Alongside Equity

    Banks

    Banks themselves come in various shapes and sizes. When it comes to business loans, you have your regional community banks, large multinational banks and specialized venture debt banks. Sometimes one large bank may roll up all of these divisions under one roof, providing a range of options from revolving lines of credit, term loans, warehouse lines and more.

    Oftentimes these banks have access to the cheapest available capital and therefore can offer you the lowest interest rate. But bear in mind that while this is usually the cheapest option, banks also have a high bar to qualify for their capital. They may include covenants or other performance requirements to ensure the business continues to meet their benchmarks throughout the duration of the loan.

    For many small businesses, taking a loan from a local community bank can be a simple low-cost option. But be aware that they may have minimum asset or cash flow requirements to qualify or even ask for a personal guarantee.

    Venture debt banks, on the other hand, specialize in VC-backed cash-burning businesses that show huge growth potential. Oftentimes, getting a loan from one of these banks requires several rounds of equity from brand-name venture capital funds, providing up to 25-35% of your most recent equity raise amount.

    Eventually, once your business is generating several millions of dollars in cash flow, an even wider spectrum of bank options opens up including some of the largest multinational banks.

    Venture debt funds

    More traditional venture debt offerings are very similar to those one would find at a bank. A three- to four-term loan structure is standard, though generally, rates are more expensive than banks with the flipside of a greater quantum of capital.

    Similarly, venture debt funds look for VC-backed companies or at least some form of institutional backing, rapid growth and high LTV/CAC. More bespoke options do exist as well, oftentimes branded as growth debt rather than venture debt, since they can provide capital to angel-backed or even fully bootstrapped businesses.

    Both of these options typically come at a cost of capital in the teens with interest-only periods and can be quite creative in structure. Founders should be aware that for both venture debt banks and funds, loan packages often come with warrants — effectively an option to purchase shares of the company in the future at a fixed price. Meaning, a small amount of dilution should be expected, though some lenders in this space pride themselves on being fully non-dilutive.

    Related: When is the Best Time to Raise Venture Debt – Here’s the Key

    Revenue-based financing (RBF)

    An increasingly popular non-dilutive financing solution for early-stage companies is technically not debt. Revenue-based financing functions more akin to a cash advance. Capital injections are repaid as a percentage of monthly revenues, as opposed to a fixed principal repayment schedule.

    If you’re looking for the fastest path to receiving capital, revenue-based financing is the solution. Many firms that use API integrations to your accounting and commerce data are able to aggregate that data through their underwriting systems and offer terms in 24-48 hours.

    While this capital tends to be on the more expensive side, speed and flexibility make up for it. Unlike other lenders, RBF facilities usually don’t require collateral or impose restrictive covenants that may limit your ability to grow.

    In terms of qualifying for an RBF, monthly revenue minimums can be as low as $10K with at least six months of operating history. The crucial requirement is to show evidence of recurring revenue. This usually means SaaS revenue with low churn, but can also be applied to most subscription-style businesses or even transactional ecommerce businesses that show a strong history of sticky customers.

    Non-bank cash flow lending

    Traditional private credit funds lend to established companies that have several years of traction under their belts. They generally are EBITDA or cash flow positive, some starting at as low as $3M annual EBITDA while others require $10M+. Businesses can be founder or sponsor-owned, and range from fast-growing later-stage tech companies to more traditional businesses and even turnaround financing for distressed situations.

    Use of capital covers a huge spectrum from funding leveraged buyouts or asset purchases to growth capital. Funding structures run the gamut, from senior secured to mezzanine debt (below senior lenders but above equity-holders) or even preferred equity in the capital stack. Rates are typically higher than banks from single digits to mid-teens, with three- to five-year terms. Closing fees and exit fees are common, as are covenants, and loan sizes are derived either holistically on the business fundamentals or as a function of cash flow.

    Non-bank asset-based lending (ABL)

    An ABL facility allows borrowers to use an asset as collateral for a line of credit or term loan. The asset can be as liquid as accounts receivable and inventory or as illiquid as real estate or a specific piece of equipment. Some of these loans can be secured with just one asset. For instance, a company needs a new warehouse and gets ABL financing for that, or it could be a combination like A/R and inventory.

    Asset-based lenders will often focus on a specific industry and require a minimum amount of whichever asset(s) they specialize in (accounts receivable, inventory, capital equipment, real estate or even intellectual property). Those assets can be held on the books as collateral or in some cases purchased outright at a discount (receivables factoring, for example).

    Unlike the other debt facilities covered, ABLs normally carve out a specific asset rather than taking a security interest on the entire company. This lowers the risk for borrowers and provides some flexibility to stack on additional debt, provided they can cover it. The advance rate (the amount of cash you get up-front) is usually between 50% and 90% of the value of the pledged assets.

    Related: The Old-School Solution to Cash Flow Problems Hiding in Your Receivables

    Questions to ask yourself

    As you consider which debt provider to approach, you need to think about the characteristics of the funding vehicle that will unlock the long-term potential of your business — while covering your short-term cash flow needs. Don’t forget that each lender has its own unique criteria. Fundraising without a clear plan of action can become a huge time suck for founders, pulling them away from operating the business. By strategizing upfront and learning the market, you can ensure that you only spend valuable time with lenders that can provide a real offer.

    Once the term sheets are in hand, you can now leverage them and pick the terms that are best for you. I’ll discuss that in my next article.

    Tim Makhauri

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  • What You Should Know About BFSI in 2023 and Beyond

    What You Should Know About BFSI in 2023 and Beyond

    Opinions expressed by Entrepreneur contributors are their own.

    Very little is clear as we look at the economy in the coming year. Inflation is high, interest rates are heading north, and many fear a recession is coming in 2023. Amidst this uncertainty, there has also been a wave of innovation throughout the banking, financial services and insurance industry (BFSI) — a wave that has only been accelerated by the pandemic and expedited shift to digital and immersive customer solutions.

    Where does the world of BFSI stand in 2023 after years of both tumult and change? We must first take stock of the BFSI landscape in order to decide the strategies and tactics we need to apply in 2023. I won’t pretend to have a crystal ball to tell the future, but after spending my entire career in the industry, I feel safe to make a few predictions about what the year might hold. These are the four trends all BFSI professionals need to be prepared to tackle in 2023:

    Related: This Software can Play an Incremental Role In BFSI Sector

    1. Collections are back

    As the government-mandated moratoriums instated during the pandemic come to an end and we enter a recession, collections will be a huge element of our work in the BFSI sector in 2023. What can we do to prepare ourselves and our customers for this reality?

    We do not want to come barging down doors, demanding collections. We must be mindful and acknowledge there is a journey to the process to avoid burning bridges with our customers. We should prepare for remediation and plan to create unique payment plans that are personalized to the customer. In doing so, we avoid breakage and keep our customers in our house. It’s like asking for couples therapy rather than an outright divorce — if we can figure out a plan together, we are much more likely to maintain our relationship and create loyalty through that remediation.

    Acquisition is far more expensive than retention; if we lose customers left and right in collection, then we are setting ourselves up for much more work (and lost revenue) down the line. Fifty-two percent of consumers switched providers in the last year, largely due to poor customer service, and we do not want to add to that statistic in the collections process. If we can be creative in our remediation tactics, we can likely save the customer, which will not only save money but also create long-term loyalty.

    2. Open banking is an essential tool

    Open banking has been one of the most important changes to hit the world of BFSI since it came into play. It creates one home for all of our assets, offering greater mobility to the consumer and the opportunity for companies to innovate new and exciting financial services.

    For example, customers can now apply for a mortgage without compiling a novel’s worth of paperwork; they can simply give their lender permission to access their accounts and look at their finances. Companies, on the other hand, can now assemble a clear financial picture of a customer’s assets and liabilities by tapping into data from multiple banks.

    Open banking has created greater ease and portability for customers and bankers alike. But as new products, services and capabilities are created in response to this development, we will see an increasingly competitive marketplace. Customers can switch from bank to bank at any time with ease, and, as we know, they are not afraid to do so. This flexibility and access available to consumers both today and increasingly so tomorrow will challenge their existing institutions to provide best-in-class terms and experiences across a vast landscape of services and capabilities. Institutions that acquired and built their customer relationships with a wedge of limited but valuable products will be challenged as providers of a full suite of solutions vie for access to these customers whose asset portability has never been simpler.

    To keep up, banks must prioritize satisfying customer demand to pay any way they want and transform how they engage with their customers to become more personalized. Furthermore, banks should work to align their strategies with the innovation, policies and regulatory changes coming our way. Open banking will be an essential tool for banks and customers alike, attracting customers seeking greater mobility and personalization in their financial services.

    Related: Cyber Security and Its Importance For the BFSI sector

    3. Insurance will be digitized

    Insurance has long been behind other industries when it comes to digitization, and though they began the process in 2020, it was quickly put on pause during the pandemic. Insurance companies need to have a radical leapfrog effect and paradigm shift in strategy, transforming their companies to become digital-first.

    As it stands now, insurance companies have no streamlined customer view. I’ve had my home, auto and flood insurance, among others, with the same company for over ten years, and yet they do not have one unified customer view of my account, nor do they have the digital assets to engage with me. So much so, that when I tried to log onto my car insurance app, it said I was not a customer.

    As we enter the new year, it will be essential for insurance companies to digitize their work and create more personalized engagement with their consumers. Consumers are more loyal when they have personalized services. If you don’t offer personalization, it will be very challenging to have any stickiness in the insurance vertical. Customers will be quick to try new companies because they have no relationship with their current provider, and thus it is no skin off their back to jump ship. This dynamic was played out in the mobile carrier market as it became easier to move providers and take your number with you.

    4. Emerging payments must be reassessed

    Many have said we’re in an emerging payments freeze with crypto, BNPL and P2P, but in reality, we’re merely in a consolidation. The leaves are starting to turn yellow and fall, but the trees are not barren. The world of emerging payments and crypto is on pause, which is not necessarily a bad thing. Now is our opportunity to look at emerging payments and ask, “What do we want to happen in this space? And how can we use the next year or two to build the right tools for emerging payments that the rest of the BFSI industry can leverage?”

    It is an opportunity, just as the start of fall beckons a new school year with fresh notebooks and sharpened pencils, to hone our products, build the right capabilities and then get back out there. Real-world and practical solutions to consumers and institutions will emerge or wilt on the vine, based on applicability. Institutions that build frictionless, embedded and native solutions for their customers to interact with will see share gains coming out of this.

    Related: These #4 Trends Hold The Key For Disruption of the BFSI Sector

    We are financial partners

    Now more than ever, the power is in the hands of the consumer. Banks can no longer coast by merely providing an account and a credit card. Consumers will be out the door before the end of the business day without personalized engagement to support their lifestyle and financial aspirations. A modern bank is a life and planning partner, and as we enter 2023 and all of the uncertainty it holds, our customers will expect to be supported via a wide array of financial services that take advantage of the data at our fingertips and the innovation banging down our doors.

    Mamta Rodrigues

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  • 8 Things Entrepreneurs Should Look for When Getting a Business Loan

    8 Things Entrepreneurs Should Look for When Getting a Business Loan

    Opinions expressed by Entrepreneur contributors are their own.

    If you need funds for your enterprise, it can be very tempting to go for the first business loan on offer. However, there are a number of things you should look for before you sign on the dotted line.

    1. The right loan type

    As with personal finance, there are several different forms of business loans, so you need to choose the one that best suits the needs of your enterprise.

    • Traditional loans: These are the business equivalent of a personal loan, which can be secured or unsecured. You’ll borrow a set amount and have a set repayment schedule with a fixed interest rate.
    • Line of credit: A line of credit provides you with a set funding amount but you don’t need to receive and pay interest on the full amount. You can call down funds as you need them and you’ll only pay interest on the amounts you borrow.
    • Equipment financing: If you need funds to purchase equipment, this type of business lending is designed to suit your needs. The piece of equipment you purchase will act as collateral for the loan, so you can usually access more flexible terms.
    • SBA loans: SBA or Small Business Administration loans are an option if you would struggle to qualify for a bank business loan. The lending criteria is more flexible, which could be a more agreeable choice for new enterprises.

    Before you agree to a business loan offer, it is well worth assessing the other types of business lending to confirm the loan is the best fit for your enterprise.

    2. Manageable loan repayments

    Before you sign the loan contract, you should have an opportunity to check the details of the loan repayment requirements. You will need to think carefully about whether you can comfortably accommodate the monthly payment in your budget, not only now but throughout the lifetime of the loan.

    If you have concerns that the payments may be difficult, or you may struggle to meet the payment deadlines, it is best to look for another loan product. Missed or late payments can not only create additional financial stress but can have a massive impact on your credit.

    Related: The 7 Different Loans You Can Get as a Business Owner

    3. Reasonable loan fees

    This follows on from the previous point, but you should also be fully aware of what fees you will incur with your new business loan. In addition to paying interest, you may incur origination fees, and processing fees. These will be added to your loan principal or you’ll need to pay them upfront. Ideally, your new business loan will have little or no such fees.

    You also need to watch for the fees you may incur during the lifetime of the loan. For example, you don’t want to get stung with a massive late fee if there is a mix-up at the bank. It is also a good idea to look out for early repayment fees. If your business finances change and you want to clear the loan, you won’t want a loan that imposes a hefty early repayment fee.

    4. A good lender reputation

    Unfortunately, not every lender in the market offers the same level of service, in fact, some can be downright risky. The adage of “too good to be true” certainly applies here. So, it is vital to investigate the lender’s reputation and be on the lookout for some red flags. These include:

    • No credit check requirement: If a lender does have minimum credit score requirements or does not require a check of your credit score by soft or hard pull inquiry.
    • No verifiable credentials: If the lender does not have a professional website and does not provide details of a physical address.
    • Lack of fee transparency: Lenders should be very clear about their loan fee structure, so you are completely aware of how much the financing options will cost.
    • Pressure selling: If the sales rep is trying to pressure you to immediately accept a business loan offer without presenting you with information and the time to study it.

    5. The correct loan amount

    While it may be tempting to get the biggest business loan you can get approved for, this is not likely to be a good idea. Likewise, if the loan offer won’t cover your immediate funding needs, it is not the right choice.

    Think carefully about what funds you need and how you’ll use them, so you can be sure to obtain a loan for the correct amount.

    6. An attractive interest rate

    As with any form of finance, your interest rate will determine the cost of your business loan. Lenders will use a variety of criteria to determine your risk profile and therefore your rate. However, these criteria vary from lender to lender, with some lenders being more rigid and some lenders being more flexible.

    If you have a brand new enterprise, you’re not likely to get the best rates, unless you have excellent credit yourself. But, it is still important to compare rates to ensure that you’re getting the lowest possible rate for your enterprise.

    However, you may be prepared to pay a slightly higher interest rate if there are minimal fees or other benefits to the loan. So, don’t look at the interest rate comparisons without some context.

    Related: 3 Different Types of Business Financing and What Entrepreneurs Need to Know

    7. A reasonable funding time

    While you may not need the funds urgently, you are still likely to want to implement your plans as soon as possible. So, check the funding times each lender offers for their business loans. After you submit your application and receive approval, when can you expect to receive the funds in your bank account?

    Some lenders can release funds in 24 hours or only a few days, but other lenders are slower. If you will have to wait weeks or months for your funds, it is a good idea to look at alternative options.

    8. Solid customer support

    Finally, it is worth checking the levels of customer support offered by your potential lenders. If you have queries or questions about your loan, can you speak to the support team quickly? Some lenders have phone helplines, while others rely solely on email or chat. So, you need to be comfortable with the customer support options.

    It is well worth reading some reviews of the lender to see if there are any red flags about long call wait times, slow responses to emails or other customer support issues before you become a customer.

    Bottom line

    Getting the right business loan for your needs requires some time to compare the different aspects and lenders. When you follow the factors above and make sure to maximize each of them, you can save money, time and financial stress.

    Baruch Mann (Silvermann)

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  • This Non-Traditional Financing Solution Lends Money to People Rejected By Banks

    This Non-Traditional Financing Solution Lends Money to People Rejected By Banks

    Opinions expressed by Entrepreneur contributors are their own.

    Real estate investing is big money, but not everyone qualifies for loans from big banks and other traditional sources. Yet there are private lenders willing to lend money.

    Private money is a way for entrepreneurs with bad personal credit to become small business owners and flip houses. This makes small business ownership more accessible to traditionally underserved communities, such as minorities, immigrants and refugees.

    Janet Gershen-Siegel

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  • How to Make More Money in 2023, According to The FI Couple

    How to Make More Money in 2023, According to The FI Couple

    It was 2017, the year before they got married, when Ali and Josh Lupo took a serious look at their finances — and realized they owed more than $100,000 in student loans.


    Courtesy of The FI Couple

    Despite working long, hard hours in human services, the couple was still living paycheck-to-paycheck, unsure how they’d afford a wedding or pay off their staggering debt.

    “So we started having that conversation of: ‘Is this what we want to do for the next 30 to 40 years, or do we want to start learning how to live differently?’ And that was where our mindset around money really started to evolve,” Josh tells Entrepreneur.

    The Lupos began tracking their expenses and saw they spent most of their income on rent and car payments, followed by food and dining out. Their first plan of attack? Implementing a strict budget: No date nights, no Netflix subscription, etc.

    But the extreme approach burned the couple out quickly, so they went back to the drawing board. They needed to find a creative way to reduce their largest expense: housing.

    Self-education led them to a solution (Ali emphasizes how many online resources, podcasts and books on financial freedom exist). If the Lupos purchased a multi-family home with a low down payment, they could dramatically decrease their monthly payments by renting out the other unit.

    So that’s exactly what they did.

    In the years since then, the Lupos have continued their journey to financial independence. They manage numerous streams of active and passive income, including their work as personal-finance content creators running the educational platform “The FI Couple.”

    If you’re ready to get your finances on track in 2023, read on for the Lupos’ step-by-step strategy.

    Define what success looks like for you

    The first step is the foundation for all the rest: Figure out your unique definition of success.

    The couple suggests considering what your ideal day and life look like. In other words, be clear about how financial freedom will allow you to do more of the things that make you happy.

    “Our life was ‘easier’ when our heads were in the sand, ignoring everything about our finances,” Ali says. “Our lives are more complicated and harder now because we’re more in tune with all of the responsibilities that come with this. But to have the power and autonomy over our time is worth all of it, so [you have to be] clear with your why.”

    Related: How to Train Your Brain and Reach the Highest Levels of Success

    Build a community that can help you stay the course

    The road to financial freedom can be a difficult one, but it’s even harder for those going it alone.

    Finding a community geared towards financial wellness can make all the difference, according to the Lupos.

    “Unfortunately, being financially savvy is not the norm,” Josh says, “and pursuing financial independence can get lonely because a lot of people aren’t necessarily living the same lifestyle. So whether it’s in person or online, having that community of like-minded people can be really inspiring.”

    Related: The Key Benefits of Building an Online Community

    Know your numbers: income, expenses, assets and debts

    Another critical move? Get thoroughly acquainted with the reality of your financial picture.

    As of September 2022, consumer debt in the U.S. was at $16.5 trillion, according to Bankrate. But many Americans are unaware of how much they actually owe: A 2019 survey from U.S. News found that one in five Americans doesn’t know if they have credit card debt.

    The Lupos stress the value of familiarizing yourself with all of your numbers.

    “So literally outlining and understanding your income, expenses, assets and debts,” Ali explains, “and having a crystal clear understanding of your financial situation.”

    Related: 5 Strategies for Entrepreneurs to Steer Clear of the Debt Trap

    Figure out how to lower expenses and increase your income

    Next up, consider how you might save and earn more money — “the two biggest levers a person can pull,” Josh notes.

    The couple acknowledges that increasing your income significantly can seem challenging at first, but the key is to get creative.

    “We decided to focus on how we could radically lower our expenses to increase our savings,” Josh says, “and doing so helped us pay off all the debt and buy real estate.”

    “If you’re able to increase your income and reduce your expenses, you’ll have more of a gap in between,” Ali adds, “and what you do with that gap is the key to becoming financially independent.”

    Never underestimate your earning potential either.

    “Coming from backgrounds in social work and human services that are historically lower-income opportunities, for a long time we identified ourselves as people [whose] value was a little bit lower and [thought] earning more just simply wasn’t in the cards,” Josh says. “In hindsight though, [the key is] getting around the right people and understanding different opportunity vehicles.”

    Related: 10 Ways to Make Money While You Sleep

    Consider which strategy makes the most sense for your lifestyle

    It’s not enough to brainstorm a solution and go all in — part of the secret is choosing an approach that aligns with your values and priorities.

    As fundamental as real estate investment has been to the Lupos’ success, the couple recognizes that it’s not for everyone.

    “The goal of financial independence is to have enough assets to pay for your overall cost of living,” Ali says. “So you have to [ask], What strategy makes sense for me? Do I want to invest in stocks? Do I want to invest in real estate? Do I want to be a business owner?“

    “We talk to people all the time,” she continues. “They say, ‘I want to buy real estate.’ But then we talk to them, and I’m like, ‘It doesn’t really sound like you want real estate. Because real estate’s not that passive — and it’s a little more hands-on.’ You really have to think about which investing strategy makes sense for [your] life.”

    Maybe the most important thing to keep in mind, though? Don’t forget to enjoy the journey to financial freedom.

    “When we first started out, it felt like a chore,” Ali says. “Through the process, we’ve learned that the journey to financial independence is more important than the destination and that it’s really important that whatever you do to get there is sustainable and you don’t sacrifice the quality of your life to achieve [your] goal. Because then once you get to the goal, what life do you have?”

    Amanda Breen

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  • Subsidized vs. Unsubsidized Student Loans: What to Borrow?

    Subsidized vs. Unsubsidized Student Loans: What to Borrow?

    Disclaimer: This article is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other financial professional to determine what may be best for your individual needs.

    A college education in the U.S. might be expensive, but it’s still accessible to many American students thanks to federal student loans. The only problem: It can be tough to know which student loans to choose from, mainly subsidized vs. unsubsidized student loans.

    If you’re unsure what to borrow or the difference between these student loan types, you’ve come to the right place. Read on for more information about subsidized and unsubsidized student loans.

    What are subsidized student loans?

    A subsidized student loan, also called a direct subsidized loan, is a federal student loan available to undergraduate students if they show sufficient financial need.

    Being subsidized means interest rates are temporarily paid for or halted by the government, and are generally much lower than unsubsidized loans. This allows students to focus on education without worrying about interest accruing on them for some of their terms.

    More specifically, the US Department of Education pays all of the interest on subsidized student loans so long as the borrower is enrolled at least half-time in school. This arrangement continues for six months after graduation and during other applicable deferment periods.

    What are unsubsidized student loans?

    An unsubsidized student loan is also a kind of federal student loan. But unlike subsidized loans, the interest rates for unsubsidized loans begin accruing as soon as money is distributed to a borrower’s school.

    However, this doesn’t mean that students need to pay the interest right off the bat. Students can choose not to pay the interest while in school and throughout a six-month grace period after graduation. However, unpaid interest accumulates during this time and constantly adds to the borrower’s total balance.

    Main differences between subsidized and unsubsidized student loans

    To recap: Subsidized student loans’ interest is paid for by the government while students are in school and for six months after graduation.

    The government does not pay for unsubsidized student loans’ interest at any point, so it consistently accumulates. Graduate students only have eligibility for unsubsidized loans, and only in some cases.

    However, there are many differences between subsidized and unsubsidized student loans aside from the above basic breakdown. Here’s a closer look at those differences.

    Loan limits and qualifications

    Direct subsidized student loans have lower annual loan limits than direct unsubsidized loans. For example, first-year dependent undergraduate students can borrow $3500 in subsidized loans and $5500 in unsubsidized loans. Both contribute to a total federal student loan limit of $23,000.

    Furthermore, students must demonstrate sufficient financial need to qualify for subsidized types of loans. You can apply via the FAFSA or Free Application for Federal Student Aid. In contrast, unsubsidized student loans are available to any student borrower, no matter their financial need.

    Interest and fees

    As mentioned above, the most significant difference between subsidized and unsubsidized student loans is how interest is handled. Subsidized student loans have their interest paid by the government for a while, but unsubsidized loans do not.

    There are other differences as well, however. Subsidized federal student loans have fixed annual percentage rates or APRs of 4.99% for all loans disbursed from July 1, 2022, through June 30, 2023. These apply to loan payments (usually monthly payments) required over the life of the loan.

    Unsubsidized federal student loans have fixed APRs of 4.99% for undergraduate loans, 6.54% for graduate or professional student loans, and 7.54% for PLUS loans. These rates apply for the same timeframe as subsidized loans.

    Meanwhile, subsidized and unsubsidized loans have fees of 1.057% for all loans disbursed between October 1, 2020, and October 1, 2021.

    Grace periods and deferment

    Subsidized and unsubsidized federal student loans have six-month grace periods, or periods of deferment, meaning student loan repayment won’t begin until six months after graduation.

    However, unsubsidized loans’ interest capitalizes, meaning that it is added to the original loan amount. That’s because, as stated above, the federal government doesn’t pay the interest fees for unsubsidized student loans.

    Unfortunately, this can lead to a spiraling and costly effect. The larger the principal loan balance gets, for example, the more each successive interest charge adds to the pile. Therefore, prospective students should be careful about using too many unsubsidized federal student loans.

    As far as deferment is concerned, the Education Department pays interest for all subsidized loans during deferment periods, like the recent one for Covid-19. Unsubsidized loans, of course, have their interest continue to be collected during deferment.

    Recently, the U.S. government released a student loan debt relief program. U.S. citizens could qualify for loan forgiveness. However, this program is currently blocked.

    How much money can you borrow?

    Now that you know the significant differences between subsidized and unsubsidized student loans, you might wonder what the maximum amount you can borrow is.

    Dependent first-year undergraduate students can borrow $5500 in student loans, of which no more than $3,500 can be subsidized. Independent students, meanwhile, can borrow up to $9,500. Again, only up to $3,500 can be in subsidized loans.

    The loan rates increase for each successive year of schooling. Here’s a breakdown:

    • Dependent second-year undergraduate students: $4,500 in subsidized loans, $6,500 total.
    • Independent second-year undergraduate students: $4,500 in subsidized loans, $10,500 total.
    • Dependent third-year and beyond undergraduate students: $5,500 in subsidized loans, $7,500 total.
    • Independent third-year and beyond undergraduate students: $5,500 in subsidized loans, $12,500 total.

    As you can see, you can only take out a certain amount of money in loans per year from the federal government. If you have more financial needs, you’ll have to seek financial aid through scholarships, grants or loans from private lenders or other institutions.

    Which should you use: subsidized or unsubsidized student loans?

    Given all this information, you might ask yourself whether you should prioritize subsidized unsubsidized student loans.

    For most American students, the answer is clear: Subsidized student loans are superior because you don’t have to worry about interest accruing while you are at school and through any grace or deferment periods.

    In this way, you’ll pay less for subsidized loans over their lifespans than unsubsidized loans. However, you can’t take out as much money in federal direct subsidized loans as you can in unsubsidized loans.

    The most followed strategy is this:

    • Apply for as many federal student-subsidized loans as you can. Take out as much money through this system as possible, as it is the most cost-effective way to pay for your education and benefit from plentiful repayment options.
    • Then, only if you still need a little more money, take out extra unsubsidized federal student loans for the remainder of the academic year to pay for the cost of attendance.
    • Alternatively, pursue other means of financial aid, like scholarships, grants, and other loans with low-interest rates from secondary financial institutions and lenders like banks or credit unions.

    If you do this, you’ll negate as many of your future interest payments as possible and walk away with as much financial aid as possible.

    Related: Don’t Be a Victim: 4 Ways You Can Take Charge of Your Student Loans

    Should you take out federal or private student loans?

    Given the potentially high costs of unsubsidized federal student loans, some students might wonder whether private loans are better.

    It’s almost always better to borrow federally first. Why? Private loans, even those offered by trustworthy financial institutions, usually have higher interest rates. They also usually require cosigners if student borrowers don’t have credit histories, which is very common for first-time college students.

    Related: Private and Federal Student Loans for College: Which Works Best for Your Child?

    Meanwhile, subsidized and unsubsidized federal student loans offer more forgiveness and refinancing options, borrower repayment plans and extra flexibility compared to private loans.

    In the worst-case scenario, if you default on your loans and have a ton of student debt, you’ll have an easier time resolving things with federal student loans than with private student loans.

    You should only use private student loans if you have to fill unexpected payment gaps to meet college expenses or if you find an excellent deal with a low-interest rate. In that case, a private student loan might be slightly better compared to an unsubsidized student loan, but that’s rarer than not.

    Summary

    In many ways, subsidized student loans might be superior to unsubsidized loans. Still, both could allow you to acquire a college education and open up new professional pathways for your future.

    If you qualify for student loans, it may be best to take them, provided you plan to pay them back once you graduate. Additionally, consult your college’s financial aid office to receive more personalized counseling.

    Looking for more resources to expand your financial knowledge? Explore Entrepreneur’s Money & Finance articles here

    Entrepreneur Staff

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  • 4 Holiday Side-Hustles for Extra Cash

    4 Holiday Side-Hustles for Extra Cash

    Opinions expressed by Entrepreneur contributors are their own.

    The holiday season is such a busy time that you might not think of taking on a side hustling gig. It’s the perfect time to do so because you are not the only one whose time is stretched to the limit. Everyone is going in ten directions at once; now’s your chance to step in, lend a hand, and make some excellent side-hustle money. Maybe you’d like to earn for that weekend getaway during the cold winter months or pay off those smoking-hot credit cards after your busy shopping season. Let’s look at some tremendous seasonal side hustles that also let you enjoy the fun of the holidays.

    Related: The Holiday Season Means More People Take on Side Hustles — the Difference This Year? They Don’t Plan to Quit Anytime Soon.

    1. Take your e-business live at a show or festival

    The holiday season is bustling with craft fairs and shopping festivals. Here’s your chance to combine a side hustle with valuable business research. My company, Hollywood Sensation Jewelry, has been an online business from the start. This year, my ingenious husband Anthony Hood suggested we participate in the Sunset Market, a huge outdoor market in Oceanside.

    Quite economically, we rented a booth, set up a tent and spent four hours selling Hollywood Sensation merchandise in public. I admit I had doubts about whether this would work for us, and I was even nervous about the public interaction. But, if you’ll forgive the pun, the results were sensational! We sold more than enough to offset our expenses. More than that, however, we got live feedback from real customers with whom we could speak one-on-one.

    If you have a product you’ve never taken out of the e-store, check your community calendar for upcoming festivals, conventions and fairs to get in on a new revenue stream and free market research. The cost of renting a booth will vary depending on the popularity and turnout of the event. I recommend starting small and scaling up if things go well. Be certain that you select an event that jibes with your brand. We might not want to take Hollywood Sensation Jewelry to a plumbing expo, but that sunset beach atmosphere was perfect for some glamor.

    Related: Unlike Many Things That Are a Lot of Work, Trade Shows Are Worth It

    2. Take your skills to the masses

    Do you have a knack for holiday décor? Fancy gift-wrapping? Event planning? Delectable baked goods? Well, not everybody does, and that’s why they need your services, especially at this time of year. Maybe you have a holiday cake or cookie recipe that gets rave reviews everywhere you go. Let folks at the office potluck and the church social know you’re available to bake one for them, too.

    Utilize social media to get your name out there as someone who can put up a beautiful Christmas tree (indoors or outdoors) and otherwise deck the halls. And don’t forget – while many people love to decorate for Christmas, almost no one loves taking it all back down again. Are you willing to do the untangling, repackaging and boxing of all that holly and mistletoe? Maybe you have a pickup truck and can haul away trees for responsible disposal.

    Sites like TaskRabbit.com let you create an account as a helping hand for a limitless variety of tasks and get customer reviews to build your reputation and bring in even more business. For example, TaskRabbit offers the following average costs for these services: “Party Clean Up” for $49-$80, “Toy Assembly” for $40-$99 and “Christmas Decorating” for $48-$86. You can even get paid to stand in line for someone else. I am not kidding!

    Related: 44 Profitable Ideas to Make Extra Money on the Side

    3. Reap the perks of a seasonal job

    Stores and delivery businesses always seek reliable help for the season. Showing yourself as an excellent seasonal employee means you can almost certainly be welcomed back the following year. And don’t forget – many stores offer their regular employee discounts to seasonal workers. If you’ve got your eye on an expensive purchase, you might get another 10% or more off the cost. My friend worked for five weeks at a home furnishings store and saved his family a bundle on new flooring and a refrigerator.

    Here’s another option: party companies are slammed this time of year, and they need people to prep, decorate, serve, check in guests, take coats, valet cars, conduct table games and clean up afterward. I have a friend who deals blackjack at holiday parties and enjoys it. She attends several fancy parties each year, hears the bands, meets fun people who are all having a great time and gets paid for doing it.

    Seasonal job salaries depend on your location, but here are some examples. On average, delivery companies pay about $16.00 per hour, warehouses about $13.80, and store gift wrappers earn around $12.00 an hour. When applying at retail stores with an eye on purchases, ask if their employee discount extends to seasonal help.

    Related: Start an Amazon Side Hustle and Earn Extra Money

    4. Be a sitter

    What do the holidays bring besides good cheer? Travelers! People have places to go and things to do, whether for an evening party, a busy shopping day away from the children or two weeks out of town. Ease their travel stress by being the person who holds down the fort. Reliable and friendly childcare, eldercare, housesitting and pet care take a load off everyone’s mind.

    It’s a relief to know someone is there to keep an eye on the house or check in on older relations to ensure all is safe. Once more, multiple gig websites let you register as a sitter (check out Rover.com or Care.com, for example). Or, get established in one neighborhood as a terrific house — or pet-sitter, and you’ll get more offers. Word gets around on the homeowners’ websites fast, and having multiple gigs in the same neighborhood adds to your convenience.

    Enjoy your holidays

    A holiday side hustle is more than just a way to supplement your income. Getting out into the holiday atmosphere is a great way to enjoy the season’s spirit, ease the stress for others and help create wonderful memories. Of course, giving is better than receiving, but if you can do both simultaneously with a holiday side hustle, that’s quite a reason to celebrate.

    Mary Hood

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