Finance Archives

Small Business Credit 

 

 

As a small business owner, you’re hardwired to enjoy a greater level of risk than the average person. But do you enjoy the thrill of small business and investing so much that you’re willing to risk: 

-Being hounded by creditors?

-Declaring bankruptcy?

-Being denied a mortgage?

-Paying more than your fair share of interest on your loans?

-Losing your house?

Small Business Risks

If you answered “no” to one or more of these questions, this may be the most important report you’ve read in a long time.

Because, if you’re like most entrepreneurs, investors, and small business owners I’ve met over the past 22 years, you’re in danger of facing all of these horrific problems.

And it’s all because of your small business.

You see, entrepreneurs typically make one or more financially devastating mistakes when financing the launch, operation and/or growth of their small businesses. In most cases, they don’t realize that they’re making a mistake. 

And to tell the truth, even when they do realize they’re making a mistake … they lull themselves into thinking that the consequences will be a minor annoyance. 

Until, one day, they can’t qualify for a mortgage. Or they can’t get the to-die-for financing offered on the new car they’re buying. Or they’re hounded by creditors and eventually have to declare bankruptcy.

And it is all because they use their personal finances to fund the launch or expansion of their small business. They then use personal credit cards to pay for small business expenses. If you are in business or thinking about starting a business, business credit is a must. 

Let me explain, most small business owner have no idea that they can establish business credit and even fewer know how to how to establish business credit. If owners would take the time necessary to educate themselves about establishing credit they would no longer have to use their personal funds for start up capital or working capital. 

They would also be able to use business credit cards which don’t report to their personal credit reports, therefore, not lowering the personal credit scores.

The most important goal of any small business is to obtain unsecured business lines of credit, which can be done once the business credit profile is set up properly. Once a small business obtains unsecured business lines of credit, they then have the working capital they need to start a business or expand their small business. The business owner has check book control to use the business lines of credit as they wish. And best of all, the business lines of credit don’t report to the business owner’s personal credit report.

If you have set up your small business profile correctly there are a number of banks that will lend to brand new start up business. That is right, brand new start up business with no track record whatsoever. The banks will extend unsecured business lines of credit so they can have the start up capital they need to finance the business of their dreams. 

Make no mistake about it; business credit is a MUST for every business owner. Don’t put your personal assets at risk finance or fund your small business!

Mastermind Strategist Moe Nawaz

Invoice Factoring

The pace of change in today’s business environment is inarguably staggering. Growth of e-commerce; changes to business structures; evolving relationships; changes to funding arrangements; access to capital and its sources. All occurring at increasingly exponential rates. Fast. The fact that there is more computing power in the average notebook computer today than it took to put a man on the moon should illustrate how fast things change, and whether in senior management or a business owner you need to keep pace. 

Factoring / Invoice Discount

In particular, you must stay abreast of changes in your competitive environment, and remain fully apprised of mechanisms that will enable a response fast enough to keep you in the game. This article will look at one of those mechanisms, access to capital and through that, free cash flow. In doing so we’ll use an intuitive framework, peppered with some economics. Why? Intuitive analysis is ideal for answering specific questions; in this case ‘What will best enable my firm to manage rapid changes to competitive economic conditions and stay in the game?’ And I’ll use economics because of Steven Levitt, America’s most outstanding economist under-40, who along with Stephen Dubner considers that ‘if morality represents how we would like the world to work, then economics represents how it actually does work.’ 

By speaking to specific anchor points, strategic issues affecting the access to capital problem can be explored and initiatives developed to allow a timely solution. In short, it’s the fastest and most accurate way to answer the question you face, because it’s easier to understand and doesn’t get bogged down in extraneous, unnecessary analysis. 

One of the anchor points in contemporary business is access to capital, especially when it helps maintain free cash-flow. In many respects they are one and the same thing, the difference merely being access to capital is a necessary precursor to free cash flow (you can’t use it until you have it). And everyone needs it. Payroll, materials, overhead, and debtors taking anywhere from 45 to 120 days to settle their accounts, using your firm as a surrogate line of credit. 

Access to capital becomes an even larger issue in the business environment described earlier, where speed to market and the ability to ‘tool-up’ (increase production) are crucial to meeting ever shrinking delivery timelines. Many of us have experienced the elation of being awarded a large tender, something that will fill the order book for the next six months, immediately followed by the hangover that comes with the realization that the firm will struggle to fund the project based on existing and forecast cash flow. 

Small-to-medium enterprises encounter particular problems when it comes to cash flow and capital access to fund growing operations, to the point where lack of access is an issue that can threaten continuing operations, even in a rising market. Balance sheets take time to build, and it is against this security that banks will lend. 

Developing initiatives to tackle this problem involves looking at some existing options and making a comparison, arriving at a decision that best enables a solution to the problem at hand. In this instance, a comparison of bank funding against invoice factoring provides insight into possible solutions for the capital access / cash flow problem. 

Everyday economics can inform this comparison, particularly the study of incentives – how people get what they want, or need, especially when other people want or need the same thing. Let’s start with banks. 

Bank lending requirements are invasive and restrictive. They often engender a feeling that you have to ‘bare all’ to borrow a nickel. They would naturally dispute this claim, but let’s return to the incentives – what is their incentive for lending you money? To earn a return off your efforts. Certainly nothing short of this, and these days they also use lending as a lever to win the biggest ‘share of your wallet’ from their rivals, trying to have you as a customer for life, ‘growing with you and your business.’ When you add the fact that a surplus of people requiring credit exist in the market, they can afford to be choosy and do the economically rational thing – be risk averse. Risk aversion drives the mortgage a bank puts on your house to ensure they get paid, and is what drives them to lend against strong balance sheets. They look at balance sheets in an accounting fashion, weighing up tangible, realizable, liquid assets like cash and real property, apply a formula and lend in accordance with how the result stack up against their risk matrix. Your continuing success is of interest to them only to the extent that it enables you to service (and ultimately repay) your debt, generating an ongoing margin on their investment. 

An overly simplistic description, the point being to illustrate that all of this takes time, and is structured around heavy regulation and evaluation constraints. Lots of time, and lots of influential rules. First, for you to build your balance sheet, and second, to get it appraised to a point where your banker might open or extend your credit facility. During that time, the window of opportunity to fund that large project, manufacturing expansion, or operations in a rising market quickly passes, leaving you out of pocket your application fee and if successful, servicing an even larger debt you might not need. 

Turning to invoice factors, the incentives might seem the same, but how they view obtaining their return is slightly different. While banks rely on their acumen in accurately predicting your ability to repay a debt, invoice factors rely on their skills in accurately assessing the ability of your customer base to pay you. A lower perceived risk aversion with invoice factors plays a small part, but it is how the factor views the overall situation that is different from traditional lending. To begin with, factors recognize your accounts receivables as assets, just like the bank. The difference is that an invoice factor considers your receivables a quickly realizable asset, and is prepared to purchase the rights (and risks) of collecting your outstanding invoices. 

Put another way, in economic terms the invoice factor recognizes your receivables as assets with a future value in cash flow terms, and provided their assessment of your customers is favorable, they are prepared to effectively ‘provide a market’ for those assets. This ‘market’ closes with your transaction selling them the invoice however; there is no secondary market like junk bonds or other derivatives. 

Access to capital through factors is more expensive than traditional lending, and this is due to the risk premium attached not to you, but your customer base. This is not surprising, and you and I would probably do the same. Returning again to economics and our study of incentives, a rational person requires a premium for every extra unit of risk they take on. A bigger incentive for a perceived higher risk. In the case of factoring, the premium is higher than equivalent bank lending rates, as the risks are considered slightly higher when the security is not real property, rather a first position claim over all of your receivables. Your risk exposure is lower than collecting the receivables yourself (invoice factors are very good at mercantile operations) – the higher fee charged by the factor compared to the bank is simply the premium you must pay to lower that exposure. 

The difference that factors provide is speed of access to capital, and what happens when you default. Default on the bank loan, you can lose your business, even the family home. Factoring is not quite as drastic, although the sums of money involved are invariably smaller. There are two types of factoring products available, recourse and non-recourse, and again, the difference comes down to assumption of risk, and the premium asked to assume the risk of non-payment on an invoice. With recourse factoring, you remain liable for non-payment by your customer, and with non-recourse, the factor assumes the risk up to a point, and at a higher premium. 

Remember most of the factoring companies are owned by the bank. It is worth talking to other factoring companies that are not attached to any of the banks. Factoring with the banks or factoring with an independent factoring company.

In summary, there are merits and pitfalls in both traditional lending and factoring. These are volatile economic times, and having been burnt a number of times during boom times of the previous two decades, banks are far more risk averse, holding tight reign on their credit standards. So in light of this information, we return to our problem, looking to answer the question: ‘Which of these approaches best delivers the flexibility I require to allow me the opportunity to prosper in a fast-changing business environment?’ 

For many businesses, the answer lies with invoice factoring, which delivers in excess of $1 trillion in credit across the continental United States. As with all business situations there are caveats, or described another way, arrangements that if not continually monitored can become a comfortable security blanket that might actually be slowly suffocating you. 

It is easy to become accustomed to continuing access to cash flow through factoring. It is also easy to feel at ease knowing you are backed by a massive publicly traded institution like your bank. Management and owners of Small and Medium-Sized Enterprises should continually remind themselves that the study of incentives works for them too. Constant review of your capital funding and cash flow arrangements is essential to ensure that the deal you end up with is the best for your firm, and not others. It’s all about getting what you want, or need, especially when other people want or need the same thing.

Invoice Factoring or Discounting

Mastermind Strategist Moe Nawaz

Small Business Tax Accountant – Investigation

Finding The Right Tax Accountant To Handle Your Tax Investigation

An ideal tax accountants will not just have a string of impressive credentials or gold lettering on his door. He or she will be caring, concerned, and devoted to their work. You need to think carefully before laying your trust in an accountant after all in some cases your life, future, money or property will be in his hands.

Apart from doing extensive research to short list possible accountants you must ensure that there is not conflict of interest, that you understand everything the retainer agreement states, and that you have checked the references and details regarding the practice.

You will know the tax accountant you have chosen is the perfect one if:

1. The tax accountant makes an effort to spend time to understand your business and tax requirements himself. He will not assign a assistant to take facts of your tax case down.

2. From experience and knowledge he will know what is relevant and what is not. He will set aside and ignore irrelevant facts, opinions, and personal emotions that cloud the case on hand.

3. The tax accountant will insist that the footwork for the case be done thoroughly. All facts must be checked for accuracy and solid arguments jotted down with backing of earlier rulings.

4. The tax accountant will not just focus on the problem at hand but examine the problem from all sides. This will create a complete picture highlighting all factors of relevance and the different ways one can approach the case.

5. The tax accountant will use his foresight and anticipate moves by the tax inspectors opinions and plan way ahead. Like a master chess player he will plan the case not by the day but by many hearings ahead.

6. The tax accountant will not waste time beating around the bush or create verbose statements—many words strung together which look impressive but mean nothing. He will insist that the case and its arguments be clearly stated.

7. The tax accountant will be self-disciplined, thorough, and self confident. Courteous at all times he will respect you as well as all the staff who work for him.

8. The tax accountant is recommended by not just his friends and relatives but by other professionals of good standing and from his field.

9. The tax accountant will not just present to you his victories but be happy to tell you why and how he lost certain cases.

10. The tax accountant will lay the cards on the table and tell you clearly whether your case stands to win or loose. He will not claim that winning is guaranteed. He will be honest and upfront about his opinions and advice.

The bottom line is that the tax accountant must be worthy of your trust. Use your inborn instincts and don’t go by the tax accountant’s good looks or fancy car or office. After all it is competence in law and in court that is of essence to you.

Everyone worries about taxes and looks for ways and means of reducing the tax burden. When you have a tax investigation in to your small business you must up date your knowledge of tax laws that pertain to “small businesses.” As a business owner you must understand clearly about accounting systems and tax planning. Sit down with your tax accountant and plan on ways of maintaining business expenses, filing receipts, planning on “tax saving” investments, and a strategy for running  the business in the most beneficial way.

Did you know that:

1. According to law you can reduce your tax liability by hiring family members to carry out work in your business. Pay your children and spouse to perform assigned duties. This way you can shift from higher tax rates to lower ones.  Ask your tax accountant for more details

2. Consider hiring independent contractors instead of employees. You will save on payroll taxes. However ensure that you meet the IRS’s criteria. 

3. Think about “deferring income” postpone receiving money to January instead of December. This means that payments received will be up for “tax” calculations a year away.  However ask your accountant’s advice as the benefits are dependant on profit and losses for the year and your corporate legal structure.

4. Take advantage of tax deductions allowed for charitable donations. Make donations in November or December instead of January so that you can include the donations for tax deductions in the current year.

5. Maximize your expenditure on equipment and office supplies. Buy in advance for a quarter and use the tax deductions allowed in the current fiscal year.

6. Include expenses of business related travel in the current year.

7. Pay all bills due before the end of the year. Payment to cell services, rent, insurance, and utilities related to the business can be included for accounting and applicable tax waivers.

8. Plan a retirement plan and make payments before the end of the year. This will reduce your income for the year and proportionately the tax due. Be sure to check on the limits. Plan a feasible and beneficial strategy with your tax accountant.

9.  Be sure to deduct from your taxable income money paid to licensing fees, businesses taxes, and annual memberships to businesses related organizations. Be sure to deduct interest paid on borrowings for running the business and related fees. Insurance premiums paid to insure the business office and machinery are eligible for tax deductions. Make a list of your memberships and check which ones are eligible for tax deductions.

10.    Check whether you have deducted management and administration expenses as well as money spent on maintenance and repairs of equipment.

Decide whether a cash accounting system or accrual one will benefit your business. The tax deductions are different depending on the system you use. When setting up your small business take the advice of a tax accountant as to which accounting system would be most suitable.

 

Mastermind Strategist Moe Nawaz

Business Finance Mistakes

Small business finance

Avoiding the top 7 business finance mistakes is a key component in business survival.

If you start committing these business finance mistakes too often, you will greatly reduce any chance you have for longer term business success.

The key is to understand the causes and significance of each so that you're in a position to make better decisions.

Business Finance Mistake (1) – No Monthly Bookkeeping.

Regardless of the size of your business, inaccurate record keeping creates all sorts of issues relating to cash flow, planning, and business decision making.

While everything has a cost, bookkeeping services are dirt cheap compared to most other costs a business will incur.

And once a bookkeeping process gets established, the cost usually goes down or becomes more cost effective as there is no wasted effort in recording all the business activity.

By itself, this one mistake tends to lead to all the others in one way or another and should be avoided at all costs.

Business Finance Mistake (2) – No Projected Cash Flow.

No meaningful bookkeeping creates a lack of knowing where you've been. No projected cash flow creates a lack of knowing where you're going.  

Without keeping score, businesses tend to stray further and further away from their targets and wait for a crisis that forces a change in monthly spending habits.

Even if you have a projected cash flow, it needs to be realistic. 

A certain level of conservatism needs to be present, or it will become meaningless in very short order.

Business Finance Mistake (3) – Inadequate Working Capital

No amount of record keeping will help you if you don't have enough working capital to properly operate the business.

That's why its important to accurately create a cash flow forecast before you even start up, acquire, or expand a business.

Too often the working capital component is completely ignored with the primary focus going towards capital asset investments.

When this happens, the cash flow crunch is usually felt quickly as there is insufficient funds to properly manage through the normal sales cycle.

Business Finance Mistake (4) – Poor Payment Management.

Unless you have meaningful working capital, forecasting, and bookkeeping in place, you're likely going to have cash management problems. 

The result is the need to stretch out and defer payments that have come due.

This can be the very edge of the slippery slope.

I mean, if you don't find out what's causing the cash flow problem in the first place, stretching out payments may only help you dig a deeper hole.

The primary targets are government remittances, trade payables, and credit card payments.

Business Finance Mistake (5) – Poor Credit Management

There can be severe credit consequences to deferring payments for both short periods of time and indefinite periods of time.

First, late payments of credit cards are probably the most common ways in which both businesses and individuals destroy their credit.  

Second, NSF checks are also recorded through business credit reports and are another form of black mark.

Third, if you put off a payment too long, a creditor could file a judgement against you further damaging your credit.

Fourth, when you apply for future credit, being behind with government payments can result in an automatic turndown by many lenders.

Business Finance – It gets worse.

Each time you apply for credit, credit inquiries are listed on your credit report.  

This can cause two additional problems.  

First, multiple inquiries can reduce you overall credit rating or score.  

Second, lenders tend to be less willing to grant credit to a business that has a multitude of inquiries on its credit report.

If you do get into situations where you're short cash for a finite period of time, make sure you proactively discuss the situation with your creditors and negotiate repayment arrangements that you can both live with and that won't jeopardize your credit.

Business Finance Mistake (6) – No Recorded Profitability

For startups, the most important thing you can do from a financing point of view is get profitable as fast as possible.

Most lenders must see at least one year of profitable financial statements before they will consider lending funds based on the strength of the business.

Before short term profitability is demonstrated, business financing is based primary on personal credit and net worth.

For existing businesses, historical results need to show profitability to acquire additional capital.

The measurement of this ability to repay is based on the net income recorded for the business by a third party accredited accountant.

In many cases, businesses work with their accountants to reduce business tax as much as possible but also destroy or restrict their ability to borrow in the process when the business net income is insufficient to service any additional debt.

Business Finance Mistake (7) – No Financing Strategy

A proper financing strategy creates 1) the financing required to support the present and future cash flows of the business, 2) the debt repayment schedule that the cash flow can service, and 3) the contingency funding necessary to address unplanned or unique business needs.

This sounds good in principle, but does not tend to be well practiced.

Why?

Because financing is largely an unplanned and after the fact event.

It seems once everything else is figured out, then a business will try to locate financing.

There are many reasons for this including: entrepreneurs are more marketing oriented, people believe financing is easy to secure when they need it, the short term impact of putting off financial issues are not as immediate as other things, and so on.

Regardless of the reason, the lack of a workable financing strategy is indeed a mistake.

However, a meaningful financing strategy is not likely to exist if one or more of the other 6 mistakes are present.

This reinforces the point that all mistakes listed are intertwined and when more than one is made, the effect of the negative result can become compounded.

That's it for now on business finance mistakes.

Mastermind Strategist Moe Nawaz

Small Business Loan To Buy A Business

Major Challenges To Securing A  Small Business Loan

Qualifying for a small business loan acquisition can be quite an ordeal to say the least.

If the business being sold is very profitable, the selling price will likely reflect a significant amount of goodwill which can be very difficult to finance.

If the business being sold is not making money, lenders can be difficult to find even if the underlying assets being acquired are worth substantially more than the purchase price.

Small Business loan to acquire a business, or change of control financing situations, can be extremely varied from case to case.

That being said, here are the major challenges you'll typically have to overcome to secure a small business loan.

Financing Goodwill With Small Business Loan

The definition of goodwill is the sale price minus the resale or liquidation value of business assets after any debts owing on the assets are paid off. It represents the future profit the small business is expected to generate beyond the current value of the assets.

Most lenders have no interest in financing goodwill with a small business loan.

This effectively increases the amount of the down payment required to complete the sale and/or the acquisition of some financing from the vendor in the form of a vendor loan.

Vendor support and Vendor loans are a very common elements in the sale of a small business.

If they are not initially present in the conditions of sale, you may want to ask the seller if they would consider providing a small business loan to support and financing the deal. 

There are some excellent reasons why asking the question could be well worth your time.

In order to receive the maximum possible sale price, which likely involves some amount of goodwill, the vendor will agree to finance part of the sale by allowing the buyer to pay a portion of the sale price over a defined period of time within a structured payment schedule.

The vendor may also offer transition assistance for a period of time to make sure the transition period is seamless. 

The combination of support and financing by the vendor creates a positive vested interest whereby it is in the vendor's best interest to help the buyer successfully transition all aspects of ownership and operations.  

Failure to do so could result in the vendor not getting all the proceeds of sale in the future in the event the business were to suffer or fail under new ownership.

This is usually a very appealing aspect to potential lenders as the risk of loss due to transition is greatly reduced.

This speaks directly to the next financing challenge.

 Business Transition Risk

Will the new owner be able to run the business as well as the previous owner?  Will the customers still do business with the new owner? Did the previous owner possess a specific skill set that will be difficult to replicate or replace? Will the key employees remain with the company after the sale?

A lender must be confident that the business can successfully continue at no worse than the current level of performance. There usually needs to be a buffer built into the financial projections for changeover lags that can occur.

At the same time, many buyers will purchase a business because they believe there is substantial growth available which they think they can take advantage of. 

The key is convincing the lender of the growth potential and your ability to achieve superior results.

Small Business Loan against Asset Sale Versus Share Sale

For tax purposes, many sellers want to sell the shares of their business. 

However, by doing so, any outstanding and potential future liability related to the going concern business will fall at the feet of the buyer unless othewise indicated in the purchase and sale agreement. 

Because potential business liability is a difficult thing to evaluate, there can be a higher perceived risk when considering a small business acquisition loan application related to a share purchase.

Market Risk

Is the small business loan going to be used for growing the business,  is the business mature, or declining market segment?  How does the small business loan fit into the competitive dynamics of the market and will a change in control strengthen or weaken its competitive position?

A lender needs to be confident that the business can be successful for at least the period the business acquisition loan will be outstanding.

This is important for two reasons.  First, a sustained cash flow will obviously allow a smoother process of repayment.  Second, a strong going concern business has a higher probability of resale.

If an unforeseen event causes the owner to no longer be able to carry on the business, the lender will have confidence that the business can still generate enough profit from resale to retire the outstanding debt.

Localized markets are much easier for a lender or investor to assess than a business selling to a broader geographic reach.  Area based lenders may also have some working knowledge of the particular business and how prominent it is in the local market.

Personal Net Worth 

Most business acquisition loans require the buyer to be able to invest at least a third of the total purchase price in cash with a remaining tangible net worth at least equal to the remaining value of the loan.

Statistics show that over leveraged companies are more prone to suffer financial duress and default on their business acquisition loan commitments.

The larger the amount of the business acquisition loan required, the more likely the probability of default.

Mastermind Strategist Moe Nawaz