Is Incorporation the Right Move When You’re Ready to Expand Your Small Business?

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When you’re launching a new business, one of the most important decisions you have to make is how to structure your venture. If you’re running the show alone, operating as a sole proprietorship often makes the most sense.

However, you may rethink how you want to define your business as it evolves. If you have an interest in expanding your operations, then incorporating your business is a logical next step.  However, incorporation is a bit more complicated than being a sole proprietor. Weighing both the advantages and disadvantages of incorporation can help you determine whether it’s something you should pursue.

How incorporating can fuel your business growth

From a growth perspective, incorporation benefits you in two ways. First, it allows you to establish credit in your business’ name. If you want to apply for a loan, establish a line of credit or open a corporate credit card account, you wouldn’t have to put your personal credit on the line. Having credit in your business’ name can also come in handy for obtaining working capital if your personal credit is less than stellar.

Besides that, operating as a corporation works in your favor if you want to raise funds using angel investors, venture capital or crowdfunding. Typically, all three require you to hand over some sort of equity stake in the business. In order to offer shares through equity crowdfunding, to a VC, or an angel investor, you’d have to be incorporated first.

Are there any downsides to incorporation?

Like any other business decision, you have to consider the potential drawbacks of incorporating before making a move.  The cost and the time involved to complete the incorporation process are the most significant obstacles to watch out for.

The requirements for forming an S-corp, C-corp or Limited Liability Company (LLC) vary from state to state; but generally, there’s a good deal more paperwork involved than establishing a sole proprietorship. The fees for filing your articles of incorporation can run several hundred dollars alone.  If you hire an attorney to wrap things up, you could be looking at an even higher price tag.

Besides that, corporations also have to deal with a more complicated tax filing. Sole proprietors report business income on their personal tax return. However, it is not as simple to file your taxes when you’re incorporated.

Corporations have the advantage of being able to pay less in taxes.  They are also able to claim higher deductions for business expenses.  But, corporations are exposed to double taxation. Meaning, the corporation is required to pay income tax.  At the same time, the shareholders pay income tax on dividends. If you’re a smaller company and the only shareholder, that could add up to a bigger tax bite compared to what you might pay as a sole proprietor.

Weigh the cost against your business goals

Incorporating early on in the game may not give your business much of a boost.  There is also a high expense, that you may not be able to justify.  However, if you’ve been in operation for more than a year, then incorporation can be an excellent stepping stone to growth.  Compare the immediate cost of incorporation to your anticipated return on investment to measure its usefulness as an expansion tool.

Strategic Funding provides needed operating funds to small businesses. Strategic Funding has helped businesses in hundreds of industries.  Industries served include: restaurants, personal services, construction, medical, manufacturing, agriculture, retail stores, automotive, and food stores.

Growing a Business Without Venture Capital, Why.

Growing a Business Without Venture Capital? Why Burn Rate Still Matters

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When you hear the words “burn rate,” you most likely think of startups that are just getting off the ground and relying on venture capital for their funding. While burn rate is something brand-new companies need to be concerned with, it’s not something that established businesses can afford to overlook either.

If you’ve been in business for awhile and you’re ready to grow, here’s what you need to know about burn rate and how to manage it more effectively.

Burn rate defined

In the simplest terms, burn rate is a measure of how quickly your business is using up its cash reserves. That could mean money that you’ve drawn from your own savings, funds you’ve borrowed from friends and family, loans and lines of credit or money you’ve raised through a crowdfunding platform.

Calculating burn rate is fairly simple. You subtract your monthly business revenues from the amount of cash you’re spending. For example, let’s say your small business has a $10,000 monthly cash outflow but it’s bringing in $8,000 in revenue. Your net burn rate is $2,000. If you have $20,000 in cash reserves, you’d be able to continue normal business operations for 10 months.

Why burn rate is important for growing businesses

When you’re a self-funded business, managing burn rate is vital because it influences the pace at which you’ll be able to expand. It’s a good way to gauge how much liquidity your business has and how long you’ll be able to keep the doors open without having to seek out additional sources of working capital.

A lower burn rate is generally considered optimal. A negative burn rate means you’re able to add to your cash holdings month over month. From a growth perspective, it’s helpful to look at burn rate in the context of where the money’s going. A higher burn rate in the short term can translate to more profitability, depending on how the money’s being used.

For instance, if you’re drawing on your reserves to cover the cost of hiring of new employees, making a major equipment purchase or expanding your business location, a temporarily higher burn rate may be justified by the return on investment (ROI).

How to manage burn rate effectively

Keeping your cash flow on an even keel is something of a balancing act, particularly when growth is part of your long game. With that being said, here are a few pointers that can help you keep your burn rate in check.

  • Reduce waste.

    A straightforward but effective way to slash burn rate is to eliminate unnecessary spending. One way to do that is by rethinking the way you utilize your resources. For instance, if a key piece of equipment breaks, ask yourself whether it’s more cost-effective to replace it or repair it. Cut down on paper waste by going digital with documents as often as possible. Making simple changes can be a boon for your burn rate over time.

  • Refine your invoicing system.

    Another way to avoid gaps in your cash flow is to have a clearly defined invoicing process. Allowing clients to wait 60, 90 or 120 days to pay isn’t feasible when you’re trying to grow. Be selective about who you extend credit to and -depending on the type of business you are running – encourage customers to pay in cash whenever possible.

  • Refinance debts if you have them.

    If you’ve taken on small business loans to fuel your growth, refinancing them could help with minimizing burn rate if it results in a lower monthly payment. Just be sure to calculate how much refinancing costs in terms of the interest and fees to make sure it’s worth it.

  • Focus on boosting revenue.

    Increasing sales is another smart way to curb cash burn rate problems. If you’re not netting the sales numbers you’d like, take some time to rework your sales strategy and processes.  Expanding profitable services or product lines while ditching ones that aren’t making as much money could be one option. Revamping your marketing campaign is another. If demand for what you’re selling is steady, raising your prices could result in the higher revenues needed to take your business to the next level.

Strategic Funding provides needed operating funds to small businesses. Strategic Funding has helped businesses in hundreds of industries.  Industries served include: restaurants, personal services, construction, medical, manufacturing, agriculture, retail stores, automotive, and food stores.

Small Businesses Face Pressure to Provide Retirement Plans - What Your Business Can Do

Small Businesses Face Pressure to Provide Retirement Plans: What Your Business Can Do

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Previous generations placed a high priority on benefits when choosing a job. If a small business offered a high salary but no benefits, job candidates might turn it down for a lower-paying government job that had health insurance and a pension.

Now that small businesses provide more than half of all U.S. jobs, pressure is increasing to include benefits with each job offer. The Affordable Healthcare Act already has small businesses considering their responsibilities when it comes to medical benefits. But in recent years, employee advocates have begun calling for retirement plans for small business workers. If you run a small business, it’s important to know the legal requirements and options for providing retirement savings.

States Increasing Pressure

In Connecticut, Illinois, Maryland, and Oregon, qualifying small businesses must deduct a certain percentage of an employee’s paycheck for retirement. No employer matching is required yet, however, which is good news for budget-challenged small business owners; but employers are required to put a program in place and manage it in the states that have passed these laws.

The Pension Rights Center maintains a state-by-state list of updated legislation relating to small business retirement plans. Monitor this list to ensure you’re in compliance with local laws as they change.

Small Business Options

Only 14 percent of small businesses offer a retirement plan, according to the Government Accountability Office, and those employers face numerous challenges. In recent years, though, it has gradually become easier, as the financial industry has begun to meet the demand for small business retirement plans. Here are a few options for small businesses.

  • Employee Fiduciary—This Mobile, Alabama-based corporation specializes in low-cost retirement plans for small business. On its site, Employee Fiduciary announces that it has the lowest total fees for 401(k) plans in the country.
  • Vanguard—Small businesses can choose from small or individual 401(k)s and SEP or Simple IRAs with low expense ratios and no setup fee.
  • ForUsAll—This startup specializes in offering a 401(k) that is easy to set up and manage. Each investment has built-in administrative and investment fiduciary protection and a transparent cost structure.
  • Dream Forward Financial—Like ForUsAll, Dream Forward is a startup that is geared toward making 401(k)s accessible to small business owners. Employees have access to the site’s Emotional Advisor to help them determine which plan is best for them.
  • SaveDay—This startup provides free, personalized advice to help employees choose and manage a 401(k) plan. Employers can sign up, test drive the experience, then encourage employees to sign in and set up their own plan.

Small businesses may assume that signing employees up for a retirement plan will cost them serious money. In truth, they can often meet any legal requirements by simply facilitating the process. As they grow, employers will likely find they can start to match employee contributions.  In addition, they’ll find that a retirement program can be a perk that will help them attract and retain employees.

Strategic Funding provides needed operating funds to small businesses. Strategic Funding has helped businesses in hundreds of industries. Industries served include: restaurants, personal services, construction, medical, manufacturing, agriculture, retail stores, automotive, and food stores.

What Owner Refinancing Means for Your Retail or Office Space

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There continues to be a tectonic shift occurring in the commercial real estate industry and it has tenants rattled. The aftermath may not have impacted you yet, but it should be on your radar.

Big box retailers are serving as anchors to move out and the brand names that we’ve come to know and trust closing shops or vanishing entirely. As a matter of fact, this is causing a hotbed of tenant confusion that’s bound to erupt.

At Cherry Creek Mall in Denver, CO, a recent owner refinance has tenants worried. Some speculate the landlord might be experiencing financial woes. Of course, they asked if this indicates whether they should begin plans to relocate. Tenants want to know if their businesses are at risk.

The real deal: owners are taking advantage of lower interest rates

In May, the Michigan-based landlord Taubman Centers, Inc. (NYSE: TCO), one of the largest REITs (Real Estate Investment Trust) in the nation, and owns and manages high-end retail and mixed-use properties, announced it had secured a $550 million, 3.87 percent, 12-year fixed loan. The deal, backed by Metropolitan Life Insurance Co,. was said to be used to repay an existing $280 million, 5.24 percent loan. Leveraging assets to restructure loans at lower interest rates is a standard procedure in most areas of real estate, not just commercial.

One long-time retail tenant who operates a franchise at the Center said he received an Estoppel Certificate in the mail, but had no idea what it was or what to do with it. The document looked unfamiliar and the intimidating legal jargon caused him to fear the worst. Anxious to find out more, he contacted his organization’s corporate office. Without delay, they were able to help him clarify matters and resolve the situation.

However, many small business retail and office tenants like restaurateurs and service professionals don’t have access to legal departments. Instead, they’re forced to pay expensive attorney’s fees in order to have simple legal documents interpreted that aren’t that complicated.

Another wave of owner refinance deals are expected to sweep across the nation. WP Glimcher Inc. (NYSE: WPG) is said to be just one of several major developers exploring refinance options.

How Developer Refinance Deals Impact Tenants

An owner refinance is no cause for alarm. However, the main issues that arises from these deals are Estoppel Certificates. Your commercial lease probably contains a clause that states you, the tenant, agree to answer letters within an allotted time frame or the landlord can answer on your behalf. Furthermore, it’s imperative that you answer and return this document on time.

What is an Estoppel Certificate?

Estoppel Certificates confirm the contractual relationship between you and your landlord. Its purpose is to evidence to a third-party, such as a financial institution, that the provisions in a lease are true.

Answering can be fairly simple. All tenants need to do is fact-check the information. This is to make sure the provisions contained are the same as those in your original lease agreement, such as the annual minimum rent, percentage rent, and license period clauses. Cross-reference each document word by word. If anything is substantively different, contact the landlord and have it corrected before signing.

Invoice Financing: Solutions for Subcontractors

Invoice Financing: Solutions for Subcontractors

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As a subcontractor, your business often depends on the contractor whose project you’re working on.  The contractors are paid upfront for their work.  However, it can be days or even months for the contractor to resolve your invoices for services rendered. So how do you keep things running smoothly in the meantime? If you’re comfortable taking on debt over the short term, invoice financing can be an effective way to secure the working capital you need.

What is invoice financing?

Invoice financing, also known as accounts receivable financing or factoring, simply means borrowing money against your business’s unpaid invoices. The amount you’re able to finance can range from 50% to 90% of the balance you’re owed. So if you have an unpaid invoice of $20,000 for electrical work that you did for a home builder, you’d potentially be able to borrow between $10,000 and $18,000, depending on which invoice financing company you choose.

Why invoice financing can be a good fit for subcontractors

There are several ways to obtain working capital during a cash crunch. When strapped for funds, business owners may consider a variety of alternative financing options.  Some of these options include inventory financing, merchant cash advances and short-term loans.  Invoice financing, however, is particularly well-suited for subcontractors for a few reasons:

Financing is fast

When you need to meet payroll or purchase supplies, you can’t afford to wait for a contractor to pay you. With invoice financing, it’s possible to get the money you need in anywhere from two days to two weeks, allowing you to avoid delays in the meantime.

Designed to be repaid quickly

The nature of subcontracting means that in most cases, you can expect payment within 90 days or less of completing a job. Accordingly, lending companies structure this type of financing in a way so that you repay what you borrow once the invoice is paid. Compared to a loan which can take years to pay off, invoice financing is more appealing. Lenders do not lock you into a long-term payment plan.

Collateral and credit guidelines are more relaxed

If you were to go to a bank for a business loan, they’d want to see a strong credit history. They’d also want to see that you had something of value as collateral. If you run a smaller subcontracting operation, your business assets are limited to your equipment, tools or a work vehicle. The upside of invoice financing is that the invoice itself serves as your collateral.  In addition you don’t need perfect credit to qualify. Just keep in mind, lenders may raise an eyebrow if your credit history includes something serious like a foreclosure or bankruptcy.

Calculating the cost

Because invoice financing is an alternative borrowing option, it doesn’t come with the same fees and interest rate structures as traditional loans. Instead of an annual percentage rate (APR), the lender assesses a processing fee. This lending company will charge this fee against your “reserve”.  Reserves are the difference between the value of your invoice and the amount you finance. There’s also a separate factor fee based on the length of your repayment term.

Here’s an example:

A contractor owes a plumber $100,000 for services rendered.  The invoice financing company is willing to front you 85% of that total or $85,000. The lending company will hold $15,000 in reserve.  They will use this money to pay fees (such as processing and factor fees).

The financing company charges a 3% processing fee against the $100,000 invoice, totaling $3,000. Now you’ve got $12,000 in reserve. You’re also responsible for paying a 1.15% factor fee, which comes to $1,500 weekly. It takes the contractor four weeks to pay your invoice. This means the financing company keeps another $6,000 out of the reserve funds. When the lending company receives the money you initially borrowed, they will return the remaining $6,000 to you. Altogether, you’ve paid $9,000 to the finance company.

If you’re thinking that seems steep, you have to ask yourself what’s more important—avoiding a fee or getting the working capital you need. The speed and convenience that invoice financing affords can justify the expense if it allows you to remain competitive in the subcontracting arena. Just be sure to compare terms from different lenders before applying.

 

Strategic Funding provides needed operating funds to small businesses. Strategic Funding has helped business in hundreds of industries.  Industries served include: restaurants, personal services, construction, medical, manufacturing, agriculture, retail stores, automotive, and food stores.

Why Short Term Debt Is the Answer When You’re Ready to Expand Your Salon or Spa Business

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Needing to expand is a good problem to have as a beauty salon or spa owner. It’s a mark of your business’s overall health when demand for your services makes an additional location or the hiring of new employees a necessity.

Before you can move forward with an expansion, however, you’ll need to decide how you’re going to pay for it. Taking on a long-term loan is one option. However, it means tying up your cash flow for an extended period of time. Using short-term debt to get the working capital you need is a smarter way to help your salon or spa grow.

Short-term financing: How it works

Short-term debt can take several different forms. However, many are not suited for expansion projects. A merchant cash advance allows you to borrow against your business’s future credit card receipts to cover things like payroll or inventory purchases. Equipment financing is another short-term alternative

. This may be appropriate if you need to upgrade your chairs or invest in a new massage bed.

When looking to expand an existing location or opening a new one, a short term loan may be the best choice. Unlike a traditional bank loan, short-term loans don’t stretch the payoff out over 10 or 20 years. Instead, these loans are designed to be repaid relatively quickly, usually within anywhere from three to 36 months. Depending on the source of the loan, you may be able to borrow anywhere from $5,000 to $500,000.

Advantages of using short-term debt to expand

There are several reasons why short-term debt is more attractive than a long-term loan for expansion projects. First, it’s generally not as difficult to qualify for short-term financing as far as the credit requirements are concerned. If your salon or spa is a few years old but you haven’t had much opportunity to build up a solid business credit history, that’s not a deal-breaker for approval.

Next, this kind of debt is more accessible when it comes to how quickly you can get funding. If you have a dire need to bring in a couple of new stylists to keep pace with your growing customer base, it’s possible to get a loan or another short-term debt in as little as two business days. That’s much more appealing than having to wait several weeks to hear from the bank regarding a loan decision.

Finally, short-term financing in most instances doesn’t require any sort of collateral. When you own a service-based business like a salon, you may not have many tangible assets beyond your equipment or inventory. This is more true if you lease rather than own the space where your business operates. Not having to put up any collateral alleviates some of the financial pressure that goes along with obtaining financing.

Choosing a short-term debt provider

Salon and spa owners have multiple avenues for finding short-term debt opportunities to make their expansion plans a reality but they’re not all the same. When you’re looking into funding sources, it’s important to pay close attention to the details.

With short-term debt, the expectation is to make payments on a daily basis versus monthly. While that may not be the case with every financing provider, you should be aware of what form your payments will take. This is especially true if your business revenue ebbs and flows seasonally. If you’re seeing a huge influx of clients during the wedding and prom seasons, for example, but business is more evenly paced the rest of the year, you need to be sure you can afford the payments regardless of how much revenue you’re generating.

Cost is the other primary consideration. Short-term debt, including short-term loans, often come with a factor rate in lieu of an annual percentage rate. The factor rate is essentially what determines the cost of borrowing. If you’re taking on a $100,000 loan with a factor rate of 1.15, for instance, you’d repay $115,000. Before you commit to short-term debt, check with the provider to determine whether they use an APR or factor rate and what the rate is so you know what the total repayment cost will be.

Strategic Funding provides needed operating funds to small businesses. Strategic Funding has helped business in hundreds of industries.  Industries served include: restaurants, personal services, construction, medical, manufacturing, agriculture, retail stores, automotive, and food stores.

Caught In a Business Credit Crunch, Short-Term...

Caught In a Business Credit Crunch? Short-Term Debt May Be the Answer

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Whether you own an upscale boutique, serve as head chef at your own bistro or run a bookkeeping service, one thing is certain—it takes a steady supply of cash to keep your business up and running. When you need to purchase inventory, pay employees or replace a piece of equipment, if you don’t have enough reserved, it may be time to borrow.

And while getting a bank loan may seem like the best choice, there’s one potential snag. Generally, you need a good personal and business credit score to get approved. If your business’s credit file is thin or your personal credit is spotty because of some past slip-ups, short-term debt can be an alternative way to satisfy your funding needs.

Short-term debt and credit

Personal credit scores and business credit scores are two entirely different things. However, both are important when you’re applying for a long-term business loan. Whether you’re going through the Small Business Administration or just getting a business line of credit from your local bank, your credit scores carry a lot of weight in the final approval decision. The lender uses your credit to gauge your ability to pay off what you’ve borrowed over the loan term.

Short-term debt uses other criteria in addition to your business or personal credit to measure how much of a lending risk you are. Take a merchant cash advance, for example. With this type of financing, you’re borrowing money against your business’s daily credit card receipts. As long as you can demonstrate sufficient cash flow, the lender’s not going to penalize you.

Something like invoice or inventory financing works in a similar way. With invoice financing, your outstanding invoices serve as collateral for the loan. As long as the lender has no reason to doubt that you’ll be paid for those invoices at some point, bad credit’s not an automatic disqualifier for a loan. Inventory financing uses the value of inventory your business has on hand that you plan to buy as the collateral and again, a lower credit score isn’t a deal-breaker.

Who is short-term debt appropriate for?

The most important thing to keep in mind about short-term debt is that it’s meant to be repaid quickly. Instead of making payments over a number of years, you may be obligated to repay the loan within a few weeks or months.

That being said, some businesses are better-suited to be short-term borrowers than others. For instance, let’s say you own a beachfront souvenir shop that only operates during the spring and summer months. Using inventory financing to stock up on sunscreen, beach towels and other tourist buys might make sense. As soon as the inventory starts to sell, you can pay it off.

Restaurant owners are also prime candidates for short-term financing, especially when credit is an issue. If you do credit card sales on a regular basis, you could use that as leverage to qualify for a merchant cash advance. Having that option certainly comes in handy if you need money for a new range or you’re hoping to open up a second location but you’ve been turned down for a traditional loan due to low credit scores.

Additional requirements for short-term financing

While poor credit may not be a barrier for short-term debt, you shouldn’t assume approval is automatic. There are still certain minimum guidelines you’ll need to meet before a lender will hand over the cash. Some of the factors they can consider include:

  • Length of time you’ve been in business
  • Annual business revenue
  • Profitability
  • Business cash holdings
  • Outstanding debts
  • Unpaid invoices

 

Researching different short-term debt options is important so you can find the best fit for your business. Even more importantly, be sure to read the fine print in full before signing on the dotted line. You need to be clear on how much short-term financing will cost to ensure that the expense doesn’t diminish your business’s bottom line.

Strategic Funding provides needed operating funds to small businesses. Strategic Funding has helped business in hundreds of industries.  Industries served include: restaurants, personal services, construction, medical, manufacturing, agriculture, retail stores, automotive, and food stores.

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