Your rates will generally range from 10–20% on NextSeed. This return is offered directly from the business to investors, and therefore NextSeed is neutral when it comes to the rate. The rate is set according to the financial information a business provides to NextSeed.
What are your points of comparison when thinking about rates of return paid to investors?
Traditional bank loans range from 7–15% and have strict loan requirements, including personal guarantees (which are optional on NextSeed). Note that traditional banks loans are not typically available to new businesses.
SBA loans have lower interest rates, so if you are solely concerned with getting the lowest interest debt financing without the community element, then this is an option.
Merchant loans, lines of credit, or credit cards typically have more expensive rates and are inflexible on their payment requirements.
Alternative lenders that provide short-term loans (typically 18 months or less) may display their rates in ways that seem reasonable, but you should consider 1) how often are you making payments and 2) how long do you have to pay in full.
For instance, a Square loan uses factor rates that can range from 1.10–1.60, meaning your fee is 10%–60%. However, that is not the interest rate. It might look reasonable for you to get a $10,000 loan with a $1,500 fixed fee and owe $11,500 total. You’d pay the $11,500 with 13% of daily card sales and a typical Square loan is paid back within 9 months. If you calculate it out, your estimated effective interest rate for that Square loan would be around 40%.
None of these sources of debt provide any business support or get you in front of a large audience of fans and supporters.
This may be the most expensive form of financing you could get. However, some businesses need a large infusion of capital without monthly payments or see the equity investor as a good strategic partner for the business.
Professional investors may expect to have voting rights and a certain growth trajectory for the business, which may impact your business decisions and company direction. The reason equity is the most expensive is because equity investors expect returns for the risks they are taking on. For instance, in the event of bankruptcy, debt holders are paid first before equity holders can split the remainder.
Raising capital from a handful of equity investors also puts more control in their hands. Negotiating returns and terms with each investor can be challenging, and putting together a deal terms often requires professional services. Remember to take into account legal and accounting costs, as well as the ongoing requirements to update investors with payment calculation and distributions.