Using Credit Cards for your Small Business Financing

I see many, many small businesses that use the business owners' personal credit cards to finance their business. Although this is often an easy source of cash it can be a terrible way to manage and grow your small business.

Often the biggest issue we see is that the business owner doesn't understand the relationship between the interest expense on the credit card debt as it relates to the net profits the business generates. We regularly see businesses where they are guaranteed to lose money on the sale of an item which the business owner set the price. Meaning the business owner thought he had priced the product to make a profit but in fact the price guaranteed a loss.

The best business planning tool?

If you plan to be in business you'd better have a Business Plan. If you plan to start a small business this tool can be the difference between success and losing everything. If you think this Business Plan tool is expensive wait til you see how expensive it is to NOT have a well thought out and written business plan.

If you are considering starting or buying a business it's a good idea to have the best tools. It may cost you a few bucks but it could be a cost that saves you many, many thousands of dollars.

A good business planning tool will also allow you to compare options from a consistent platform.

I think the best Business Plan Software on the market today is Business Plan Pro . (Yes, this is an affiliate link and we get a few cents if you buy it but, hey, give us a break, we did the research).

The best part about this software is it's intuitive and you don't need an MBA to operate it. The Standard edition is all most people ever need. It's a product that has been around for many years and it's very practical and efficient to learn.

As you can see the layouts are clean and easy to understand.



If you are going to get into business you need a plan that is logical, well thought out and proven. Trust me, if you go to your banker with a professional business plan your odds of getting financing improve dramatically. A plan like the one Business Plan Pro produces will be a requirement for any SBA loans that you apply for or pursue.

Here's a few fatal mistakes a good business plan can help you avoid.

The best time to have a business plan is before someone asks you to see it! Get ahead of the curve...get your plan.

Circular Money and the U.S. Tax System

Listening to a financial radio station today I heard something that caused me to say..."what?" Here's the outline:

First the Cash Source:
China has gobs of U.S. dollars that they get from selling us incredible amounts of stuff.
China is catching heat for owning so much U.S. Treasury debt, so they want to use the US Dollars for something other than lending it back to the US Treasury. So why not loan it to U.S. companies?

The Use of Cash:
A big U.S. company, that will remain nameless, pays 1.8% dividend on it's stock. Note, this is important ...Dividends for biz are not tax deductible, meaning companies pay dividends after they pay their tax obligations.

So what to do?
This company borrows US Dollars at 1.7% interest from China. The 1.7% interest is tax deductible which means the effective cost of the interest is about 1.2%...and remember the effective cost of dividends is 1.8% because dividends are not tax deductible. So the cost to the company for borrowing from China is 33% cheaper than the dividend cost.

The solution, borrow US Dollars from China, deduct the interest from taxes and use the cash to buy back the stock which eliminates the 1.8% cash dividend cost and replaces if with an effective $1.2% cash cost.

Incredible but true, another case of the perverted U.S. tax code. Borrowing is more tax effective than returning cash to shareholders as dividends.

What is Working Capital and why is it Important?

Many small business owners don't understand or appreciate the need to have a good handle on working capital and how it is generated or consumed by the business. Let's take 2 examples on opposite ends of the business spectrum.

First a Day Spa. At a day spa the customer comes in, pays for the services and then gets the services - no accounts receivables to collect...no money, no service. Also, a Day Spa sell lots and lots of Gift Certificates. With gift certificates the biz collects $100 for a gift certificate and has the cash for weeks, months, years or even forever before the service is delivered. That's called negative working capital. I get your money before I incur the cost of providing the service.

Now lets look at an office supply business. A customer calls up, orders 5 cases of paper for delivery at a cost of $200 and the customer wants you to "bill" them. Which means they will pay in about 30 days. This $200 order requires a lot of working capital...you had to buy the paper, pay the driver, pay the person who took the order all BEFORE the customer pays you the $200. All those expenses you had to pay out before the customer paid you needs working capital to pay.

That's why understanding working capital is critical, if you are in a business that needs working capital to grow you'd better figure out where the working capital is coming from before you start to grow. Many. many profitable businesses have gone out of business because they didn't account for, and plan for, the working capital needs of the business.

New Tax Law is ready to go but.......................

The new tax law extending current tax rates and spending a couple of hundred $$Billion$$ more is headed for the president's desk.


However, FYI - the bill does not rescind the obligation for businesses issuing 1099s that was passed in the Obama care bill. Soooo............. unless something changes look for small businesses being burdened with many 1000s of 1099s to be issued. I saw an IRS estimate that they would get over 1 BILLION more 1099s under the new law!  By example, for my business I'll need to go from about 15 issued 1099s now to about 300 required under the new law. Geeeezzz..............................

The Bush tax cuts debate and the real small business story

It's hard to avoid the politicians ranting either for or against the extension of the Bush tax cuts. Like many issues in life, for every complex problem there is a simple solution that is absolutely wrong.

Those opposed to the extension often try to separate the issue of "who" gets the extension. The theory is the high income earners should not get the extension and therefore pay more in taxes because they can afford it.

Those in favor of extensions for everyone say if the extension of the cuts isn't done it will cost jobs and be a drag on the economy.

In this case the unfortunate truth is they may both be right. So if they are both right how do we decide which policy is best.

Let's take the case of Mary who owns a pest control business. Like many small business owners her income can vary wildly from year-to-year. For the sake of this discussion let's say that she and her husband, who also works in the business, make $300,000 combined. Since many politicians have said that the tax cuts should not be extended for those who make over $250,000 let's use that as income above which the Bush tax cuts expire.

So let's go with that, Mary and Bob currently make $300,000 per year and, if the Bush tax cuts are eliminated, they are going to get a 10% tax increase on income over $250,000. I'll use round numbers again..their new tax rate goes to 40% from today's current 36%.

Now Mary and Bob have a good idea. They think they can grow their business next year and increase their income by $50,000 to $350,000 but they will need to hire someone for $32,000 a year to do the job. Seems like a good idea right? Spend $32,000 and make an extra $50,000..easy decision. Well, maybe not. Here's the math if the Bush tax cuts expire for her:

1. Mary pays an employee $32,000.
2. Mary makes additional $50,000 before tax and $30,000 after taxes (40% tax rate)
3. Mary pays additional tax of 3.6% (difference between old rate and new) on the $50,000 she already makes above the $250,000 tax increase line. That's another $1,800 in taxes

So what happened here? Mary made $50,000 more and has $3,600 less in cold hard cash. (The math is $50,000 - $32,000- $20,000 - $1,600 = -$3,600)

What would you do? Take the risk of hiring someone for $32,000 so you can lose $3,600?

The same situation if the tax rate for Mary is extended:

1. Mary hires and pays an employee $32,000
2. Mary makes additional $50,000 before tax and $32,000 after taxes (36% current tax rate)

In this case if her plan works Mary is break-even. Remember from above, if the tax increase goes into effect Mary will lose $3,600 if her plan works perfectly. Without increasing her taxes she's break-even.

What's the difference? If the tax increase goes into effect and Mary decides not to hire the new employee

 the tax effect to Mary is $1,600 and the new employee doesn't have a job.

If the tax increase doesn't go into effect what happens? Mary hires the new employee, Mary pays $18,000 MORE in taxes because she made $50,000 more taxed at old rate AND the IRS gets to tax the new employee on his $32,000 salary. Mary makes more money, another person has a job and IRS gets more money. But Mary had to be willing to take the risk! None of this happens unless Mary takes the risk. It's not the government taking the risk, it's Mary that has to take the risk. 

There are millions of people like Mary and Bob in the U.S. today making these same decisions every day.

The point of this is that nearly all financial decisions are made at the margin not based on the overall. Mary didn't make her decision based on the $300,000 she makes, she made the decision based on the next $50,000 she might make. 

Ready to Buy a Business - Your 401(k) could be your best friend!

If you are considering buying a business don't overlook the value of your 401(k) as a good source of financing. According to CPAs who specialize in this investment vehicle the IRS code currently allows you to access your 401(k) without triggering income tax or early withdrawal penalties when used to purchase a business.

Your 401(k) and an SBA Loan from the Small Business Administration could help you buy a business and build the wealth that is often created when you own and operate a successful small business.

Could there be a better investment than investing in yourself?  For free information and complete details click here.

Guest Post on SBA Lending

Why SBA Loan Production is Down
Sheila Spangler, CBI, Capital Strategies, Boise, ID
 
There was an article recently on CNNMoney.com that said SBA loan production is down 36 percent from 2008. As business brokers, many of us have felt that pinch first hand, but have you wondered why SBA loans have waned along with the rest of the credit market? After all, don’t those loans have a guarantee? Why won’t the bankers make them? I decided to do a little research.

As a former commercial banker, banking school graduate and business broker, I am a big fan of SBA loans. I’ve originated many in the last 20 years. Without these loans, my main street business clients would not have been able to sell their businesses to new owners or expand. We are suffering through the worst economic crisis since the Great Depression. During the Depression, interest rates were too high and no one could afford to borrow even though there was plenty of liquidity. Today, the problem is different. Rates are low yet liquidity is even lower for banks. Here’s two reasons why banks aren't willing to open the credit spigot:
1) Unhealthy balance sheet. Just because a bank may have paid back TARP, it doesn’t mean the bank is “healthy.” In many cases, problem loans are not being addressed because doing so would cause write-downs, which erode bank capital. The regulators are stepping softly in many cases encouraging bankers to term out loans for longer than normal periods to avoid losses, business closures and panic. But in many cases, the bankers are using a “head in the sand” approach and not addressing problems.
2) Fear of making the wrong decision. Bankers are running scared. The lack of capital and unaddressed time bombs on the balance sheet has made them even more cautious than normal. They are playing a waiting game: waiting for things to get better. But it’s a catch 22. Eventually, someone has to step forward and lead the charge. Of course, just like the eager lieutenant on the battle field, there is always a chance they’ll get shot in the back, too.
You’re probably thinking “Okay, but why don’t banks make SBA loans since they have a government guarantee? Aren’t they completely safe for the banks?  What have they got to lose?”
Here are my top four reasons why SBA loan production is down. These reasons are based on experience and conversations with bankers, regulators and debt buyers.
Banks:

• Laid off their experienced SBA business development officers and underwriters when the market melt down happened last year.
• Don't want to learn the program because they perceive the return to be low, and for many, what they don’t understand, they fear.
• Know that even if they get the SBA loan done properly, there is really no assurance that the bank will be able to collect on the guarantee to get “paid back” should the business fail. The loan must be properly underwritten and serviced in order to maintain the guarantee for the life of the loan.
• Don’t like unknowns and right now everything is an unknown. Is the seller’s business really able to withstand a transition now? Does the buyer really have the skills to manage and lead? Is there a hidden problem?

It’s going to be awhile before the credit market loosens. In the meantime, buyers and sellers of businesses have to get more creative and flexible. This means sellers will have to self-finance more of the transaction. That’s good for buyers but not so good for sellers that want to exit the business and not worry about it any more.
In some cases, the business owner may not be able to sell the business at all. So he or she will have to continue to work longer. This is heartbreaking for many business owners. Some have worked years to build their businesses and now see them falter just when its time to retire.
The only thing I can say is this: business owners are the toughest people in the world. Just like everything else in your business life, you’re going to have to find a way to fix this yourself. Perhaps we can form a business owner’s co-op and provide loans to each other to take the banks out of the picture. Now wouldn’t that be something?

The Myth of..... "If I had more capital I could grow faster and be really, really profitable."

Here's a request we often hear from small business owners:

"Can you find me an investor? If we had more capital we could grow like crazy and make a ton of money!"

My next question to the business owner is "What would you do with $100,000 if someone wrote you that check today?"

Wow, you should hear the answers I get to that question. Here are a few examples:

"I'd pay off my debts so I could get a new loan." Huhhhh???

"I'd lower my prices so I could sell more stuff." Huhhh?

"I'd pay off some of my personal debts so my wife would stop yelling at me." That one I understand!

Even for the biz owners with answers that sound reasonable the exchange often goes something like this:

Me, "What would you do with $100,000 if someone wrote you that check today?"
Biz Owner: "I would expand my business."
Me, "How would you expand it and when would your expansion turn into additional profits?"
Biz owner, Blank stare.

The bottom line is, in all my encounters (and there are very, very many) with small business owners who say they want or need additional capital less, than 5% have a plan that makes any sense whatsoever. And then they wonder why a bank won't give them small business loans.

The vast majority of small business owners are really very bad at planning. The reasons for it are many but I think the primary reason is they have little or no idea what pieces of their businesses create the results.... good or bad.

Most small business owners are hard working, they show up for work every day and hope that working hard will result in success. Unfortunately there is very little correlation between hard work and financial success. What you need is hard and smart, not just hard work. If you own a small business spend more time on detailing out a logical and well thought out business plan. A business with a good business plan is much more profitable and infinitely less stressful than a business that wings it day-to-day. Start now, create a 1 year plan for 2010. Simple 1 year plan, week by week. Do it NOW, your deadline is to have it done by January 2, 2010. Give it a shot, what if I'm right?

Once you have a plan have someone who is successful in small business look at your plan. Don't worry about being wrong. Worry about getting better, your health and your bank account will thank you.

Have questions about what should be in your plan? Shoot me questions related to your business in the comment section and I'll try to answer them.

To paraphrase a famous business saying "A weak plan with mediocre execution will always beat no plan over the long term. A good plan well executed will always beat a great plan poorly executed."

Should you have your small business books audited?

For the vast majority of businesses with revenues under $2,000,000 the answer is no. Unless, you have external requirements from bonding company, shareholders, finance companies, etc.

However, even if you don't have those direct external requirements for Audited financials you should have your books at least "Reviewed" by an independent CPA. A Review is not just "hey, take a look". A Review is a formal process that is less expensive than an audit but with many of the same benefits. What are the direct benefits to the business owner?

1. A look at your business through the eyes of business experts not involved in your small business day to day. These fresh eyes can show you how to improve profits, better manage cash, reduce risk, etc.

2. A reviewed statement will reduce the impact of "on the fly" accounting treatments that are often made by internal bookkeeping staffs. The review will add discipline which will make the financials more useful. For instance, do you now account for your cost of goods sold the same way every year, every month so that you can compare the information and make decisions accordingly?

3. It is much, much less expensive to get reviewed statements if you've committed to the review BEFORE the year begins. Going backwards is more work, much more work.

4. You may not think you need Reviewed books now but what if 18 months from now you are approached by a buyer who is willing to make you a great deal to buy your business but they only buy businesses with at least reviewed financials for 3 years. You could miss the opportunity of a lifetime. You need to commit to accurate reviewed books before you have any idea you will need them.

5. I assure you that a bank will be more likely to approve a loan to a business with reviewed books than a business without reviewed books. And what if having reviewed books means you don't have to sign a personal guarantee for the loan? Big advantage there!!

If you want a small business that is easier to run, more profitable to own and more valuable to sell then start NOW to get your books reviewed by a qualified CPA.

List of Common Problems We See in Small Businesses

Below is a list compiled from talking to and evaluating hundreds of small businesses. Small business opportunities to improve are often very easy and inexpensive, it just takes a little attention to detail and a commitment to improvement. Here is my list:

1. Detailed written procedures for critical or repetitive tasks. Most small business owners struggle with "finding good employees" the problem is usually not that the employees are not "good" it's that new employees learn differently and written instructions can get new employees productive faster and less likely to get frustrated and give up.

2. No system to follow up on sales opportunities. It's incredible how often we see this. Customer calls, asks a few questions then says "I'll call back", business doesn't even ask for a phone number much less check back with the customer.

3. Poor accounting makes the financial statements essentially useless for operating the business. The lack of accurate financials makes budgeting very difficult and consequently we often ask the question "How's the business doing?" The answer, "Seems pretty good, I guess my accountant will tell me in March." Not good.

4. The small business owner really has no idea how his pricing is compared to competitors. They don't do any "research". Their only feedback is when their customers tell them "Your price is too high!" Duh, most customers will tell them that even if it's the lowest price they received!

5. Failure to seek expert advice until they have a problem. You know the saying, an ounce of prevention....... Often small business owners do not want to pay an attorney, CPA, financial planner because they think the issue won't be a problem....but when it is a problem... it costs them 10 times as much as it would have if they had done a little up front work.

SBA Loans have new underwriting policy

A few days ago the SBA came out with a new lending policy to be used when buying a business. Business brokers are very excited about this change since it will facilitate more financing for small business purchases. About 15 months ago the SBA made a draconian change in their underwriting that eliminated business acquisition financing for goodwill in excess of $250,000. This 2008 policy change effectively dried up SBA lending for buying a business sales. Small business financing is a unique problem since the loans are usually not large enough for lenders to make much profit.

SBA loans are a very important part of the small business financing options. The newly released SBA business loan policy allows up to $500,000 in goodwill financing or if the buyer puts up at least 25% in equity the goodwill limit is uncapped.

This policy change is important because the goodwill value in the transaction is an indication of a highly profitable business.

SBA loans are back and business buyers and sellers will be more able transfer business ownership to retain jobs and help their communities grow.

Financing the Small Business in Today’s Environment

Guest post from Mr. Tim Stamps DRDA, PC

Most of us have encountered a budding entrepreneur who has spent the majority of his/her career in the corporate world and then finally musters the courage to step out on a limb and start their own small business. They face a few problems, though: despite his long-standing corporate career and a nice 401(k) for retirement, they have very few liquid assets and are in need of some capital for their business start-up.

For many small business owners the prime source of funding comes from personal savings, or by refinancing their personal residence with a home equity line of credit. Even so, entrepreneurs still often use outside sources such as friends and family, capital markets, or private equity groups. Funding from third parties can prove undesirable, though, because outside sources usually expect a lion’s share in the business in return for equity financing.

BORSA: A compelling, yet widely unheard of source of equity is the Business Owners Retirement Savings Account. BORSA, for short, is a tool which allows entrepreneurs to fund the purchase or recapitalization of a franchise, business start-up, or business property using their holdings in a 401(a) pension profit sharing 401(k), 403(b), 457, or IRA rollover. By utilizing the BORSA these purchases can be accomplished without distributions, taxes, penalties, or the use of retirement plan loans.

DRDA, P.C., a CPA firm, designed the BORSA (c) in 2005 as a result of extensive research for a tax and penalty-free solution for clients with the need to access their retirement accounts to start a business. They analyzed the provisions of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA), as well as professional publications and court cases that they felt were pertinent. Additionally, DRDA sought the expertise of a nationally recognized ERISA attorney to solidify the legality of such a solution. Today, the BORSA is recognized and is available in all 50 states.

There are three basic requirements for setting up a BORSA for a business venture. First, the business owner must have an existing retirement account such as an IRA or one of the other aforementioned accounts and have the ability to transfer or rollover the funds in the BORSA. Second, the business must be an eligible “active trade or business” that will have at least one employee. Third, the individuals need to work with professionals familiar with BORSA rules and governing laws.

To clarify, a BORSA is not a loan, nor a self-directed IRA. A direct investment into an “active trade or business” by a self-directed IRA is prohibited. The federal government does recognize the use of money from a 401(k) plan as an equity investment. In fact, the Small Business Administration SOP 50-10(5) that was released August 1, 2008 stipulates the SBA will not require a 401(k) plan owning more than 20% or more of a company to guarantee the loan. What’s more, unlike other sources of funding such as credit cards, SBA or asset-backed loans the BORSA plan does not generate additional debt for the business owner.

For additional information on the BORSA plan visit www.borsaplan.com or contact Tim Stamps at DRDA, P.C: 1521 Green Oak Place, Ste 198, Kingwood, TX 77339; telephone: 281-852-3131; email tim@drdacpa.com.