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Thinking About Financing A New Business?
is a tough call to make, regardless of what the economy is doing. In a down market, however, the stakes are even higher. A poor economy reduces your options when it comes to getting your business off the ground and keeping it there. Some would-be entrepreneurs put off starting a small business altogether.
The number one challenge facing would-be entrepreneurs is small business financing. If you don’t have investors, and your personal savings isn’t large enough to front the cost of startup and to cover your own expenses while you build your business income, starting a business may not be in the cards.
There are several options for financing, but loans can be difficult to get if your credit is not pristine and your business plan has some holes in it. The Small Business Administration will back loans for both capital equipment and other startup costs. The loans are administered through private lenders and you’ll need to meet the lending standards in place at the time you apply.
Legislation under consideration in Congress right now would enable the Small Business Administration to lend directly to borrowers if no private lender will accept the loan application. In addition, the legislation would permit the SBA to increase the amount of its guarantee from 85% to 95%. Even with these incentives, private lenders who are risk-averse are unlikely to part with the capital an applicant may ask for.
You may also attempt to secure a personal loan from the bank or another private lending source. If you’re applying to a private lender, this route will be difficult to manage if your credit isn’t perfect. Personal lending volumes have dropped significantly, since many consumers aren’t interested in taking on more personal debt and few lenders are interested in writing new loans.
For some new companies, a business cash advance is a likely option. Like a credit card cash advance, a business cash advance is relatively easy to get. Business cash advances are usually based on the credit card sales of a business. Unlike a loan, there are few papers to file, and most businesses that request a business cash advance are approved.
To apply for a business cash advance, the business must be located in the United States, must accept Visa or MasterCard and must have credit card transaction volumes of at least $2,500 per month. Using a business cash advance, the lender provides payment up-front for future credit card transactions. As the transactions are made, the lender is repaid. Repayment includes a small percentage of the borrower’s daily credit card receipts.
The business cash advance is an unsecured loan. There is no collateral to put up, and the business simply conducts itself as it would under ordinary circumstances. Repayment occurs as the credit card transactions are processed, so there’s no monthly loan payment to make. Businesses can receive advances of up to 1.5 times their monthly credit card sales volumes, so you can get the emergency cash you need when you need it. There are no restrictions on what the cash advances can be used for, and advances can usually be arranged in a week or less.
If you would like more information about how a business cash advance can work in your favor, contact Rapid Capital Funding today.
Photo Credit: Dani Simmonds
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Small Business Financing For The Self-Employed
There’s no doubt that small business plays a big role in the US economy. According to figures from the US Small Business Administration, small businesses (those with 500 or fewer employees) are responsible for creating between 60 and 80 percent of the nation’s net new jobs. These figures don’t include what the government refers to as “non-employer firms” - those that provide for just one person. Small business financing can be a major problem, especially for the self-employed.
There are an estimated 21 million self-employed persons in the US right now. That’s significant because the data suggest that the self-employment picture has remained relatively stable, even in these weak economic times. Although some analysts expect to see a slight decline in the number of non-employer firms in 2009, self-employment remains a viable option, even in the toughest recessionary period the US has seen in years.
One of the biggest challenges faced by the self-employed is a lack of capital. The self-employed typically self-finance, too. Banks are often unwilling to take a chance on someone who is self-employed - even when the loans they’re seeking are backed by the federal government - because banks are highly risk-averse right now.
One type of self-employment appeals to many would-be entrepreneurs: franchises. The franchise is very attractive to people who are looking to set up their own business, yet need or want the support of one that is already established. Franchising represents a huge self-employment opportunity, provided that the prospective franchisee has the capital needed to get the business off the ground.
Buying a franchise can mean buying an established franchise from another person, or it can mean self-starting a new franchise. Start-up costs range from nearly nothing, to well over a million dollars, depending upon the kind of franchise under consideration. The bottom line is that many prospective franchisees need access to cash.That’s a tough sell to a bank when the applicant has no other viable source of income.
Fortunately, there are lending options that don’t rely on standard lending guidelines. Business cash advances, for example, can provide the cash a small business needs with few of the restrictions that banks would impose. For US-based businesses that accept Visa or MasterCard and have more than $2,500 in credit card sales each month, access to cash can be very easy, using a business cash advance.
A business cash advance can provide access to as much as $250,000 with no restrictions on how the money is spent. Use it to pay bills, buy equipment, make improvements, fund an expansion or whatever else needs to be done. The advance is based on future sales and 95% of applicants are approved.
In a down economy, the self-employed can’t afford to wait for things to get better! Get cash today with a business cash advance.
Photo Credit: Alexander Korabelnikov
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Alternatives To Business Loans
The Equipment Leasing and Finance Association reports that the December Monthly Leasing and Finance Index showed a drop of 13.3 percent in December, compared to the same period in 2007. The index tracks equipment-financing activity. The MLFI-25 index is used in conjunction with other economic reports to provide an overall picture of the health of manufacturing and production in the United States.
New business volume declined by 3.6 percent. One bright spot in the report shows that month-to-month new business volume increased 120 percent in December, compared to figures for November. The report also tracks the status of receivables over 30 days old. The index shows a drop of 3.7 percent in December over outstanding receivables in November. Credit approvals dropped to an all-time low of 71.5 percent and more than one-third of responding businesses reported fewer transactions in the month of December.
The availability of credit continues to affect businesses and their production capacity. The Small Business Administration reports that its 504-loan program, designed to help small firms purchase major assets fell 82 percent in the first quarter of 2009, compared to the same time period in 2008. 7(a) loans, designed to help small businesses start up, fell by nearly half.
Loan volumes are significantly lower, in part, because the programs are administered through private lenders. While the federal government backs 85% of each SBA loan, applicants must still meet tougher lending standards. Even with only 15% capital at risk, many banks feel that start-up companies and those that want to expand represent too much risk.
One option for small business owners is a business cash advance. These loans provide unsecured working capital for businesses and are based on a merchant’s future credit card transactions and are often easier to acquire than a small business administration loan or a loan from a private lender. To get a business cash advance, the business must be registered in the US, accept Visa or MasterCard and have credit card sales that exceed $2,500 per month. Unlike loans, the business cash advance can be used for anything, including the purchase of equipment.
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Small Business Owners Short On Optimism In Q4
A recent Gallup survey of small business owners shows that they plan to ride out the recession by cutting both jobs and spending. The quarterly survey, which was conducted in November 2008 and forms the basis of the Wells Fargo/Gallup Small Business Index, indicates that there is little room for optimism among small business owners who are attempting to survive the recession.
The index, which measures small business owners’ overall confidence in their operations, took a substantial plunge in the fourth quarter, falling 35 points to just ten. That mark is the lowest ever recorded by the index since Q3 2003, the first quarter in which the survey was conducted.
Slightly less than one-third of all survey respondents said that their revenues increased in the preceding twelve month period. In contrast, nearly one-half of survey participants experienced a revenue decline in the same period. Respondents also reported a corresponding decline in capital spending, with only one in five respondents reporting an increase in spending on equipment and facilities. Nearly four in ten respondents said that they have restricted their capital expenditures in response to the sour economy, and say that reduced access to capital in the fourth quarter was hurting their business.
More telling, slightly more than one in ten respondents say that they added personnel to their operations in 2008, and nearly three in ten have reduced staff in response to declining revenues.
While major employers make headlines by slashing thousands of jobs at once, the impact of small business is anything but small. According to the US Small Business Administration, nearly all of the nation’s employers are classified as small businesses, and provide slightly more than half of all private-sector jobs.
Some states aren’t waiting for the federal government to finish its stimulus package. They’re looking for ways to support their small business owners. Texas governor Rick Perry is proposing to eliminate state taxes on businesses that register less than $1 million in currently taxable revenue. The move is designed to encourage startup companies, and is seen largely as a win for companies in Texas, who paid nearly $83 million in taxes in 2006, just two percent of the state’s overall tax revenues, yet make up 80 percent of the state’s employing firms.
Photo Credit: Sigurd Decroos
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Small business owners have a large burden on their shoulders right now. Many states are looking to their small businesses to provide the boost needed to get the economy moving again. With the astounding pace of corporate restructuring and taxpayers leery of more bailout plans, Congress is working on new incentives and loan packages for small businesses.
In the yet-to-be-released stimulus package, the House version of the bill would inject $430 million into the Small Business Administration loan program. In addition, the measure will give the SBA the ability to make loans directly to business owners. This provision side-steps private lenders, who reduced their lending volumes by more than half between the fiscal 2008 and 2009 years.
The bill doesn’t cut out private lenders altogether. Instead, it increases the government-guaranteed portion of SBA 7(a) loans from 85% to 95%. The SBA’s role in lending looks much like that of the “lender of last resort.” Under the current plan, the agency will take in loan applications from small business owners and forward them to private lenders within a 100-mile radius of the applicant. If no private lenders come forward, the SBA will work directly with the applicant to provide access to capital. Under these circumstances, the SBA would also service the loan.
In another boost for private lenders, the SBA will make loans to secondary-market brokers and dealers who buy and sell small business loans. The secondary loan market is essential for primary lenders, who use the market as a way to refresh lending capital.
Although the issue hasn’t yet been addressed in the proposed legislation, President Obama has said that he favors approaches that reduce the fees associated with SBA lending. High fees and other costs have discouraged many private lenders. With private lenders unwilling to take on more risk in lending, the low returns on SBA loans has made participation in the program impractical for many lenders.
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In January of this past year (2008), there was a report at Research Central and CIO Insight online stating that 186 different financial institutions (credit unions included) had been victimized by online fraud. Additionally, attacks on online credit unions had accounted for 45% of all monthly activity during 2007. Conversely, attacks against national banks had decreased by nearly 44% during the same time frame. Speculation has arisen that with a weakened economy that the credit unions are now easy targets for hackers and scam artists.
The above reports appeared to be just the tip of the iceberg for the problems that the nation’s credit unions have been experiencing throughout 2008, or possibly a harbinger of worse issues to come. It became obvious that the financial sector in the US was infected by the evidences of numerous credit losses and write-downs. Back in August, a report was released by the Wall Street Journal that five of the biggest credit unions in the US have lost considerably on mortgage-backed securities in the residential real estate sector. Entire equity bases were literally wiped out in the process.
This indicates that this housing market distress has been spreading even into the financial sectors were there is less risk involved. Gerald Hanweck, who is a finance professor at George Mason University and is a visiting scholar at the FDIC, has studied the banking industry for quite some time now and feels that the situation has been growing more serious throughout 2008.
In addition to the above, the federal regulator who oversees the US credit unions claims that the losses will most likely reverse themselves once the mortgage markets become more stable, and once these institutions become more adequately capitalized. However, there are some outside observers who are very concerned that these credit unions have underestimated how deeply the problem is running within the mortgage industry.
According to Hanweck, this is a very serious situation and it isn’t getting any better. Hanweck believes that the five credit unions have sufficient funding available to handle a deeper downturn in the situation, but he continually worries that added risk could lead to a more serious run on funds with one or all of them. Since 1990, the total assets of US credit unions have been consistently increasing from just over $200 billion to just under $800 billion as of the end of the second quarter of 2008.
Credit unions are member-owned, not-for-profit cooperatives (organizations) that lend money and take deposits like regular banks. The credit unions have become key players in the mortgage industry, and their problems are focused on the so-called “corporate” credit unions. Unlike the standard credit unions, the corporate entities do not deal directly with the consumer. However, they do provide financing and investment services to the regular credit unions who do deal directly with consumers.
According to several federal regulatory filings, the five corporate credit unions that are showing the largest mortgage-related losses are:
Constitution Corporate Federal Credit Union
Members United Corporate Federal Credit Union
Southwest Corporate Federal Credit Union
U.S. Central Federal Credit Union
Western Corporate Federal Credit Union
As of the end of May, 2008 they had reported nearly $5.7 billion in “unrealized” losses which occur when the current market value of any security drops, whether it has been sold or not.
The fact that these credit unions are experiencing grave financial strain, even though they are the most conservatively operated institutions in the financial sector, indicates that no financial sector is immune from this mortgage meltdown malady. It has also caused far-reaching damage throughout the commercial bank sector and the Wall Street financial services. Mark-downs of over $300 billion in connection with the mortgage industry dilemma have already taken place as well.
As a result of regular credit unions being too small to engage in more sophisticated investing, the corporate credit union came into being for the purpose of serving these smaller entities. A portion of the assets/funds of these regular credit unions gets placed with one of the corporate ones who in turn will invest the money. Assets of the 28 corporate credit unions (which are owned by the member credit unions) total roughly $90 billion. US Central provides the member credit unions with investment services in addition to being a service provider for the corporate ones.
Credit unions, like banks, are insured by the Federal Government for up to $100,000 per account and up to $250,000 for retirement type accounts. Seven of these regular credit unions failed in 2007, and as of August (2008), nine have failed so far. Since these regular credit unions have funds deposited with the corporate ones, a financial failure at that level would equate to losses for the regular credit unions involved, as well as losses for the depositors/members of them. Additionally, it has been 13 years since a corporate credit union has failed, but eventually, the regular credit unions involved with them did recover their funds.
From a historical standpoint, 25 years ago in 1983, Congress passed legislation to increase the United States’ contribution amount to the International Monetary Fund. There was also a conference of 13,000 government financial officials and international bankers that was held in Washington, D.C. during Reagan’s Presidency. It was the joint annual meeting of the IMF and World Bank wherein they addressed problems with the US dollar and interest rates. Of equal importance, these issues shared the stage with concerns over the deadlock of IMF funds.
As of early December, 2008 a two-tiered plan to help those institutions battered by investments in the lending and mortgage sectors has been introduced by the federal agency that oversees the operations of US credit unions. As of this coming January, 2009 the NCUA (National Credit Union Administration) will be awarded a $41.5 billion “shot in the arm” that was approved by Congress in September (2008) to stimulate some liquidity for corporate credit unions that are experiencing continually mounting losses on securities tied to mortgages and other types of home lending.
Additionally, this plan also provides another $2 billion for retail credit unions so they can cut their interest rates on mortgages that are currently held by homeowners who are struggling to make their payments on time. In addition to this, the funding has been structured in the form of repayable loans. No matter what the future holds, or what happens with the long-term viability of these troubled corporate credit unions, the NCUA is counting on the retail credit unions having a serious interest in (and committed to) preserving the entire credit union sector through these difficult financial times.
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When you own a small business, saving on overhead costs is critical, and if you do not manage the costs of your operating expenses effectively and properly, it can kill your business. Of all the expenses involved that are not directly related to manufacturing your product or delivering it, expanding overhead expenses are dangerous. Here are three critical aspects that you need to be aware of concerning operating expenses or overhead:
Even in small businesses, overhead expenses have the tendency to increase, usually slowly and often times unnoticed. You may find yourself confronted with a serious situation - your overhead expenses have grown and are out of control.
Swollen overhead costs are a threat to the competitiveness of your small business as well. By the same token, lower overhead costs can become one of the best competitive weapons in your arsenal.
Creeping costs can oftentimes be insidious. Those seemingly minor costs that get added here and there start to add up. Just remember that it is very easy to add additional overhead expenses, but eliminating them can be far more difficult.
Your office space is a prime example of a major overhead expense. The big mistake that most new business owners make is that they have more space or higher quality office space than what is actually necessary. I call this one “overkill”, but the only thing that really gets killed is your cash flow and your profits. Keeping overhead expenses in check is the most ideal reason for designing and using a home office.
I consider this list of the 6 most important action steps to deal with first in order to help you save money on overhead in your small business:
1) Focus on cutting your energy costs – this is one of the major areas that drain a business’ bank account and they are continually rising. A terrific source of assistance in cutting energy costs is the government-backed program called Energy Star.
2) Control your inventory – carrying excess inventory or the wrong inventory hinders your turns on that merchandise and can ultimately cripple your operation. Inventory control software is available online and it is highly advisable that you invest in this.
3) Do you have a cost-effective insurance policy? – another critical area is business insurance. You might want to consider re-evaluating the type of coverage that you have versus what you actually need.
4) Don’t waste money by spending it on waste – sounds redundant doesn’t it? I’m referring to what it costs you monthly to have your trash removed. Try using smaller receptacles and having fewer pick-ups per month.
5) Spend less time on the phone – phone costs can be lethal. A good suggestion here is to look into converting your landline over to VoIP (an internet-based phone service provider). This is much cheaper than the standard phone service.
6) Involve your employees – believe it or not, you would be amazed at how adept your employees can be when it comes to identifying wasteful spending in your business. It is always advisable to enlist their assistance in your cost-cutting mission, just be sure that you can reward their valuable input if that is warranted.
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