Building Resilient Businesses Contest Kapitus Small Business

Help Kapitus Award $250,000 in Cash Prizes to Deserving Business Owners!

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Kapitus is excited to announce the finalists for its inaugural, $250,000 Building Resilient Businesses contest after weeks of painstakingly judging over 300 video submissions. The contest was launched this summer as a way for Kapitus to give back to the small business community, which represents the backbone of America’s economy and personifies the American Dream of hard work, sacrifice and success. 

The submissions, which came from small businesses scattered across 37 states and the DC metro area, were all distinct and well-thought-out, but 15 videos stood out for their passion, storytelling, creativity, and the ways in which they would use the first-place prize of $100,000 to benefit and grow their businesses. 

Now that the 15 finalists have been chosen, Kapitus is relying on you, the public, to vote on which of the finalists should be included among the 7 winners of the competition.

Vote for your favority business

The prizes are: 

  • 1st place (one winner): $100,000
  • 2nd place (one winner): $50,000
  • 3rd place (five winners): $20,000
  • All winners will be given a complimentary, 8-hour consulting/advisory session to help them with their businesses. Advisory sessions are available in digital marketing, financial management and data analytics.

The finalists’ videos were chosen by members of Kapitus based on their storytelling, creativity, enthusiasm and the ways in which they would use the $100,000 for their business, but members of the public can use whatever criteria they see fit when voting. To vote for your favorite, please go to https://kapitus.com/brb-vote/, carefully watch the videos, and select the one you believe stands out above the rest. Only one vote is allowed per person and voting is open from Monday, September 19, 2022 through Monday, October 10, 2022

Please help us congratulate the 15 finalists (listed in reverse alphabetical order): 

  1. The Tree Yoga Cooperative – South Los Angeles, CA – Black & Latina-Owned hub of holistic wellness and community support. We provide accessible, inclusive, trauma-informed and culturally centered yoga classes and training to all body types, abilities and ages.
  2. the Enchanted Rose Emporium – Vancouver, WA – Providing a unique collection of vintage style gifts and craft supplies emphasizing sustainability and teaching classes in the handcrafting skills of yesterday to children and adults – preserving these art forms.
  3. TFTI Experience – Houston, TX – Houston’s original photo experience. 15+ creative installations for jaw-dropping photos including Infinity Mirrors, LOVE Letters, Upside Down room, DJ Confetti Room and more. TFTI has something fun for everyone.
  4. Superfit Hero – Los Angeles, CA – Superfit Hero is the world’s most inclusive line of premium plus size activewear for women, with sizes L-7XL. Fitness is for Every Body.
  5.  Strands of Faith – Pearl, MS – SOF is a conscious beauty brand curated and formulated with cruelty free rich ingredients to nourish, restore, and refresh textured strands while increasing moisture-length retention and overall healthy hair.
  6. Stir it Up – Fairbanks, AK – Inspired by a little boy with allergies and a town lacking options, Stir It Up provides options for your dietary lifestyle, guaranteed. A women-owned company specializing in gluten-free, vegan, vegetarian & low-carb options.
  7. Postal Petals – West Hollywood, CA – A new way for people to enjoy the beauty of flowers through the experience of arranging them. Fresh-cut flowers are shipped nationwide for customers to create their own DIY floral arrangements.
  8. Play Pits – Atlanta, GA – 100% all-natural deodorant, free of aluminum, parabens, synthetic fragrances, and harsh chemicals. Play Pits is a mother’s solution to providing a kid-friendly, all-natural hygiene option for youth with active lifestyles.
  9. Monolith Games – Siloam Springs, AR – A small husband- and wife-owned board and card game shop. We have created a safe space where people can hang out, play games, and above all – be themselves.
  10. Kai’s Kookies – Houston, TX – Specialty bakery offering low-carb gluten-free treats with no added sugar. Inspired by a father and daughter who recreated their baking style due to allergies and a commitment to improving health.
  11. Frères Branchiaux Candle Co – Indian Head, MD – Frères Branchiaux Candle Co. is a mission-based company that creates vegan fragrance products. Founders Collin, Ryan, and Austin Gill have donated $40K to homeless shelters through sales of their products.
  12. Fat Lady Cakes – Amherst, NY – Fat Lady’s Cakes and Pies specializes in the creation of gourmet desserts made from all-natural ingredients. From classics to new innovations, we offer a full range of flavorful treats.
  13. Courtside ATL – Lithonia GA – Creating VIP basketball experiences where anyone can participate, by deconstructing the game into: Shoot, Dribble & Pass. We employ tech features to transform, gamify and transfer content for elevated experiences.
  14. Brash Brownies – Winston-Salem, NC – A mobile, black woman-owned, bakery with small batch desserts based on old family recipes and innovative imagination. Brash Brownies is bringing Louisiana culture to North Carolina.
  15. Black People Will Swim – Long Island, NY – Smashing the stereotype that Black people don’t swim, Black People Will Swim is based on four foundational pillars encouraging people to F.A.C.E. (Fun. Awareness. Community. Education) their fears.

Official winners will be announced by October 28, 2022.

(Originally Published September 19, 2o22)

Kapitus small business rent crisis lending

Small Business Rent Crisis: What You can do to Survive

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Small businesses, facing a markedly different world than the one they faced at the height of the COVID-19 pandemic, are getting hammered by rising rents and demands for back rent payments. Rising inflation, employee shortages, rent increases and federal pandemic relief funding running dry have all contributed to 40% of small businesses in the US not making the rent in August 2022, according to Alignable – up from 33% in March. Another 45% of small businesses said that their rent has increased since 2021.

This has become an urgent crisis for Main Street businesses in virtually every industry that operates out of physical locations. Small agricultural businesses, independent restaurants, nonprofits, automotive dealerships, and the travel/lodging industry have been hit the hardest, with 50% of agricultural companies and 46% of restaurants missing their rent payments in August 2022. 

Small Business Kapitus lending rent crisis Alignable

Roughly 40% of small businesses missed their rent payment in August 2022, according to Alignable.

What can Small Businesses do?

If your small business has missed a rent payment or if you are struggling to figure out how you’re going to meet your next rent payment, your options obviously aren’t great. There are, however, some steps you can take to try to help ease your situation. 

Kapitus spoke to Stephen Cameron, president and founder of Level On Demand, a real estate services company that provides small businesses with real estate services such as contract reviews and property analysis. Cameron, a 20-year veteran of the commercial real estate market, shared his advice on how to deal with the current rent crisis.

#1 Know Your Landlord’s Situation

Before you try to negotiate with your landlord on missed or late rent payments, it’s important to first research whether the landlord is even allowed to compromise. Commercial real estate spaces are often owned by investment funds such as hedge funds or private equity firms, or even by pension funds or family offices. 

Hedge funds and private equity firms often require their landlords to enforce lease agreements to the letter with no room for negotiation, while a family office or pension fund will see some payment as better than nothing. If this is the case, you may want to consider moving your business to another space altogether.

#2 Read Your Lease Carefully!

If you informed your landlord that you’re going to be late on your next rent payment, it’s important to

Kapitus Small Business Real Estate Stephen Cameron Level On Demand rent crisis

Stephen Cameron, president of real estate consulting firm Level On Demand, stressed that small businesses should know their lease agreement before negotiating with their landlord.

read your original lease agreement, as most agreements do contain a grace period to make the payment on time. Often, these grace periods are three- to five days, and sometimes can even be up to 15 days. 

“The more important part of the lease to check is how many days you – as a tenant – have before you’re in default,” said Cameron. “This is much harder to recover from than just making a late payment. 

Cameron also stressed the importance of notifying your landlord in writing if you know you’re going to be late with rent, let them know you’re going to make that payment and see if it’s possible to negotiate late fees, as many landlords would rather avoid going through the hassle of looking for a new tenant. 

“If you have missed your payment deadline and any grace period, in most cases it is to your advantage to make written contact with your landlord as soon as possible,” said Cameron. “Sometimes it’s easy to forget that, in many cases, landlords are not large corporations, but just people who have a mortgage to pay and just want everything to work out with minimal problems.”

#3 Can You Negotiate Late Fees?

Negotiating late fees often depends on the goodwill of your landlord, because those fees are usually spelt out in your lease agreement. According to Cameron, these fees can range from 5% to 15% of one month’s rent, and a tenant won’t be in good standing with the rent until the full rent and late fees are paid. Cameron warned that “This is a commercial space, not a house; the eviction process is not as friendly here.”

Eviction rent crisis small business Kapitus Stephen Cameron Level On Demand

Negotiate with your landlord early, as the eviction process for small businesses is a lot harsher than for residential properties.

He also emphasized that it’s important to negotiate late fees and a grace period before you sign a lease. “For anyone contemplating signing a new lease right now, who may be concerned they will need a longer grace period, there are options,” he said. “Especially in the case of new, seasonal or sales-dependent businesses, negotiating with a landlord to get a few ‘freebies’ or months per year in which rent can be paid late without a penalty or fee is not out of the question. Just be prepared for a landlord to ask for something in return.”

#4 How do you Negotiate Your Lease?

If you are looking for a lower rent but don’t want to move, one strategy you may want to consider is negotiating a new lease with your landlord. 

This isn’t going to be easy because landlords, like small businesses, felt the brunt of the economic impact of the pandemic. Many small businesses could not pay rent for months during the height of COVID, and many more still owe back rent.

Before you attempt to negotiate, Cameron suggests trying to gauge whether your landlord is in good shape or hurting financially before you negotiate a new lease. 

“There are a lot of motivations, financial and otherwise, in play these days, so asking for a reduction in rent or to keep it at its previous rate is very common right now,” he said. “I’m seeing tenants across the country having more success negotiating down their base rental rates in exchange for increases on their variable expenses, such as common area maintenance, utility reimbursements, etc.”

#5 Consider a WFH Arrangement or Shared Space 

Obviously, a working from home arrangement isn’t an option for businesses such as independent

Kapitus Level On Demand small business lending

Many small businesses have turned to shared workspace arrangements to mitigate rising rents.

restaurants and small construction companies. However, if your business operates out of an office, working from home or even moving to a cheaper, shared space through companies such as Industrious or Regus can be a much more cost-effective option for you, as it has become for many companies since the beginning of the pandemic.

“For smaller or more agile companies, having a dedicated mailing address may be enough,” said Cameron. “I’ve seen many of these companies supplement their occasional need for dedicated space by having company retreats at larger Airbnb homes or even reserving hotel-style conference rooms.” 

#6 Is it Worth Buying Your Property?

If you believe you can save enough for a down payment and can afford to wait until interest rates come down again, there are definite advantages to purchasing the space in which your business is housed outright. The biggest being that (depending on the purchase arrangement with your bank) your monthly payments will be fixed and never increase, and you’ll never have to beg for an extension or negotiate a lease with a landlord again. Not only will your property become an investment, but purchasing the property can also reap tax and depreciation benefits of ownership. 

There are also disadvantages of ownership, however. For one thing, it takes away your ability to easily move locations. Second, just as you are responsible for maintaining your house, you will be responsible for maintaining your business property, which can be costly. If you need a new roof or wish to re-landscape the space, you will be responsible for paying for that.

“Ultimately, the choice for a small- to medium-sized business between remaining a tenant or purchasing a property should be looked at objectively,” Cameron warned. “I’ve seen many business owners absolutely fall in love with a space that was perfect for their business but had no real value to anyone else. When it came time to move the business and find a new tenant, there were none to be found.”

#7 If you Have to Move…

As we are living in uncertain economic times, moving your business and finding a cheaper location won’t

Kapitus moving small business rent crisis Level On Demand

If you have to move your business to another location, you may have to settle for less space if you want a decrease in rent.

be easy, but if you’re unable to reach an agreement with your current landlord, you may not have a choice. 

If your business relies on local customers, you’re probably going to need a space in the same neighborhood in which you currently operate. Since you’d be seeking a space that is ideally cheaper than the one you’re moving from, you may have to consider making due with a smaller space since the commercial rent market is fluctuating right now. 

As previously mentioned, if you do move to a new space, carefully negotiate your lease with your new landlord.

Carefully Consider Your Options!

Being late on or missing your rent payment is never ideal and comes with few easy answers. The worst thing you can do, however, is to just ignore the situation. You should realize that you do have a few options, the first being to make sure you keep your landlord in the loop as to what’s going on. Carefully try to renegotiate, and in case that fails, it’s crucial to have a backup plan. 

Natural disaster

Can Your Small Business Use SBA Disaster Mitigation Assistance?

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Damage from natural disasters happens to businesses in every climate and on every corner of the United States. No business is wholly insulated from extreme weather or natural phenomena, and nothing is more frustrating than if your business suffers damage that could have been avoided. Weatherizing and mediating damage from natural disasters at your place of business is as important as any other precaution you can take. One of the major reasons small businesses may put off building improvements for the purpose of mitigating damage from natural disasters is undoubtedly the high price tag of many of those improvements. While there are several more general financing options when planning to improve your business, the SBA’s Mitigation Assistance Program – an expansion of their larger Disaster Loan system – may seem like an attractive option for making safety improvements to your business. It is then essential that small businesses understand where and when SBA-backed mitigation assistance is possible.

What is SBA Mitigation Assistance?

The SBA’s disaster mitigation assistance program allows businesses within declared disaster zones to apply for additional funds specifically for improving their businesses to better protect against future disasters. To see if your business is in a current disaster zone, use the SBA’s classifying tool. Existing disaster loans can be expanded up to 20% in the name of mitigation assistance, but the total value of the disaster loan may not exceed $2 million. There are, however, several examples of when that cap has been waived.

This means, however, that your business must first be approved for a disaster loan to qualify for mitigation assistance. Approval for a disaster loan, of course, requires that your business suffer damage because of a declared and recognized natural disaster. The SBA directly explains that if you suffer damage to not only property or leased spaces but machinery, equipment, fixtures, or even inventory, you may be eligible for disaster assistance. That means even if your damage is rather small or not immediately pressing, applying for a disaster loan could also open the door to applying for that additional mitigation assistance up to 20% of your principle.

Applying for mitigation assistance is only allowed once your business has been approved for a disaster loan of any kind. There is no additional application for mitigation assistance and applicants must call the SBA directly (800-659-2955) or speak to your already-assigned inspector. It is then up to the business owner to explain their intended mitigation project.

What Qualifies as Mitigation Improvements?

Flood Mitigation Measures: Among the SBA’s examples of viable improvements can run from comparatively small projects like sealing a roof all the way to relocating your business outside of an existing flood plain. Depending on the size of the principle of your existing disaster loan, of course, larger projects will only apply to larger cases of damage. Mitigation examples also include landscaping to improve natural drainage, installing a sump pump, converting the lowest level of your building to reduce flood risk, or even elevating your entire business.

Wind Mitigation Measures: Wind damage can be related to anything from tornados to winter storms. Especially in colder climates, it is very common for the SBA to declare a disaster where heavy snowfall and storms impede daily life. Examples of viable projects include installing pressure-rated windows or a pressure-rated garage door, investing in hurricane roof straps, or even building a full storm shelter.

Wildfire Mitigation Measures: Considering how wide west coast wildfires tend to spread, it is possible for a business to be within a declared disaster zone and not necessarily suffer catastrophic damage. Thus, the SBA gives examples of improvements like installing a fire-rated roof, replacing combustible fences or gates, removing debris brought about by the wildfire, installing tempered-glass window panes or mesh screens to prevent ash from coming through air vents.

Earthquake Mitigation Measures: While several states require that new buildings be fitted with earthquake resistant materials, businesses in buildings built before those modern processes are often the most susceptible to damage. The SBA offers examples of mitigation such as buying anchors for rooftop-mounted materials, buying window film to reduce glass spread during a quake, or retrofitting masonry or concrete buildings. Once again, the SBA offers an extremely wide range (economic and manpower) of projects meaning that even if your project is not specifically listed, there is a fair chance it will still be considered.

Hail Mitigation Measures: Hail damage isn’t likely to level your entire place of business but if that damage is sustained over the length of a storm, hail damage can become very costly. If you are seeking mitigation in connection to a hail-based disaster loan, the SBA gives these examples of acceptable projects: installing steel gutters, replacing existing structures like skylights or shingles with more weather-resistant alternatives, or installing hail guards.

Preparing for the Worst Leads to Weathering the Best

The mitigation assistance program is best used by businesses who suffer enough damage from a natural disaster to justify a disaster loan but are not devastated so fully that they need to find a new place of business. Disaster loans are meant to bring your business back to working order as quickly as possible, and thus, the money from those loans is generally only allowed to be used on strictly essential elements. Mitigation assistance, then, is a fantastic opportunity to take up improvements and safety measures at the same rate of your disaster loan which is likely considerably less than non-SBA-backed loans. Further, the SBA gives an extremely broad spectrum of examples when explaining what applies as mitigation. Especially as hurricane season looms on the East Coast and Wildfires continue in the West, there are likely quite a few small businesses who could benefit from further mitigation.

Kapitus secured line of credit small business lending

Pros and Cons of a Secured Business Line of Credit

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If your business needs to have fast access to cash, having a business line of credit (BLOC) in place can be invaluable. Before you apply for one, however, one of the first questions you need to ask is whether a secured or unsecured business line of credit is for you. Both options come with pros and cons, so it’s crucial that you carefully consider which is best for you.

What is a Line of Credit?

Secured and unsecured lines of credit are types of financing that give your business the flexibility to borrow funds at will with pre-agreed upon payback terms and credit limit. Whether you need cash to meet a business emergency or to meet payroll during the offseason, you can use the borrowed money to finance any aspect of your business that you see fit. 

Secured and unsecured lines of credits, however, have different risk profiles for the borrower, so they  usually come with different limits and interest rates. 

What’s the Difference? 

A secured BLOC is a form of financing that requires collateral to ensure that you pay back the borrowed amount, while an unsecured line of credit does not require collateral. 

An unsecured line of credit typically requires a high FICO score, a certain number of years in business (usually at least two years) and a strong cash flow. This type of line of credit normally ranges between $10,000 and $100,000, depending on the needs of the borrower, and comes with a variable interest rate often pegged to the prime rate plus several percentage points.

A secured line of credit, while typically reserved for business owners with lower credit, requires borrowers to put up valuable assets as collateral. That collateral can include real estate, equipment, present and future invoices and inventory. If you operate a pass-through business, you may even have to put up personal assets such as your house or personal savings. That said, however, a secured line of credit does have distinct advantages:

#1 Secured Lines of Credit Usually Offer Lower Interest Rates

Rising interest rates Kapitus small business lending

Fed Chair Jerome Powell has already announced five rate hikes this year with more still to come.

The Federal Reserve has hiked interest rates five times so far this year with more coming, so cost of capital is a major concern for borrowers. Since a secured line of credit is collateralized with tangible assets, the lender takes on much less risk when providing this type of loan, so therefore, depending on your FICO score and the amount of collateral you put up, there’s a good chance that the interest rate on a secured BLOC could be lower than an unsecured one. 

#2 Your FICO Score can be Lower

Almost all lenders consider a high credit score to be one of the most important qualifications for financing, so if your FICO score is below 650, trying to secure a loan may be a frustrating experience. Since a secured BLOC is backed by assets, your chance of getting approved with a lower credit score is far higher than if you were applying for an unsecured line of credit.

#3 You Could Secure a Higher Line of Credit

A secured line of credit could come with a higher limit than an unsecured one.

While not in all cases, an unsecured BLOC usually tops out at $100,000 to limit the risk of the lender. Even for small business owners with great credit who are able to get approval for an unsecured BLOC, they often have to put up collateral if they want a limit exceeding $100,000. Depending on the value of the collateral being put up, a small business owner is more likely to obtain a higher limit with a secured BLOC than an unsecured one. 

#4 Secured BLOCs May Have Longer Repayment Terms

Securing your line of credit brings a host of benefits, and one of them is that your repayment term will usually be longer than with an unsecured BLOC. Putting up real estate as collateral can be especially beneficial, as the lender may increase the repayment term and the limit since the value of real estate usually increases over time. In some cases, the repayment term on an unsecured BLOC can be up to 10 years, whereas with an unsecured BLOC, it is usually far less. 

Cons of a Secured BLOC

While a secured BLOC does have its advantages, there are also potential drawbacks to consider before applying for one:

#1 You Risk Your Most Valuable Assets

To get approval for a secured BLOC, you need to put up valuable collateral. These can include your home or a highly valued piece of property. If your business relies on expensive pieces of equipment such as tractor-trailers or medical devices, or the future payment of invoices, those assets could be put up as collateral but would be at risk if you fail to pay off your debt. Therefore – just as you would with a personal loan – it is crucial that you make sure you can meet the repayment terms before you take out a secured BLOC.

#2 More Paperwork is Involved

You’ll probably need to consult with an attorney when applying for a

A secured line of credit will involve a lot of paperwork, as well as advice from a business attorney.

secured BLOC. That’s because you will need an expert to hash out the terms of repayment, especially if calamity hits and you are unable to pay back the amount you borrowed. An attorney can negotiate terms of what assets you will have to surrender in case you default on payments. 

#3 Interest Rates Vary

While the interest rate on a secured BLOC is generally lower than an unsecured one, the rate will still be variable, meaning that they will fluctuate as interest rates fluctuate. This underscores the importance of making sure you understand the exact terms of the secured BLOC before you take one on. 

A BLOC is not a Credit Card!

There is a common misconception that a line of credit is like a business credit card, but don’t be mistaken – the two are not the same. Yes, they both provide a line of credit and only charge interest on the amount you borrow. However, a line of credit ideally should be used for bigger, foreseeable expenses than a credit card since the interest rate is typically lower, and in some cases, you usually won’t get the cash from a line of credit for 24 hours. Plus, lines of credit have term limits and different repayment terms than a credit card. 

A business line of credit is a great tool if you need to get new office furniture or appliances, if you need cash for a business emergency, or if there is unexpectedly high demand for one of your products and you suddenly need to purchase more inventory. On the other hand, a business credit card will usually come in handy for sudden cash needs, such as picking up the tab for a business meal, or if your flight gets canceled during a business trip and you suddenly need to pay for a hotel room. Business credit cards also offer perks such as travel miles, but generally charge a higher interest rate than a BLOC. 

Carefully Weigh Your Options

A secured BLOC can give you great benefits if you need access to cash to grow your business or for an emergency. However, you need to carefully consider the terms of this type of financing, and like you would with your personal finances, you shouldn’t spend more than you need to.

Kapitus rising interest rates small business lending

How to Handle Another Painful Rate Hike

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More bad news for small business owners – for the fifth time since March, the Federal Reserve Board has hiked the overnight rate, this time by 75 basis points (0.75%) as part of a year-long effort to tame inflation. 

The latest hike will further drive up the cost of capital on most loan products, especially those being offered by traditional banks, and cause more pain for small business owners that have had to rely on financing this year in the wake of skyrocketing inflation, supply chain disruptions and rising worker salaries.

How Painful is the Hike?

Rising interest rates Kapitus small business lending

Fed Chair Jerome Powell announces yet another painful rate hike to tame inflation.

Small businesses that rely on financing have already bore the brunt of several rate hikes this year, and the latest rate hike will further raise the cost of capital for both fixed- and variable-rate loan products. The first pain point will be felt by small businesses that already have variable rate financing tools in place, since a hike to the overnight rate means that the prime rate – the interest rate commercial banks charge their most credit-worthy borrowers – will once again rise. 

The prime rate, which is used as a base rate for variable rate financing products such as business lines of credit, which often charge the prime rate plus several percentage points as the cost of capital, will rise once again. Since March, the prime rate has risen from 2.75% to 5.5%, and after this hike, could rise to 6.25%. 

What are the Current Loan Interest Rates as of September 2022?

It’s impossible to tell how high interest rates will go on specific lending products, since the rates charged greatly depend on the creditworthiness and other factors of the borrower. It is fair to assume, however, that the cost of capital for fixed-rate lending products, such as term loans – especially those being offered by traditional banks – will continue to rise. One measure to examine are the rates on the most popular small business loans out there, the SBA 7(a) loan. 

The 7(a) loan is a term loan offered through partner banks to small businesses with generally excellent credit history and at least two years in business. At the end of 2021, when the prime rate was just 3.25%, the maximum interest rate on a 7(a) loan of $25,000 or less with 7-year term or less was 7.5% (assuming the borrower has excellent credit). 

As of the end of August 2022, with the prime rate being 5.5%, the same loan carries a 9.75% rate. For a loan of $50,000 or more with the same term, the rate was 5.5% at the end of 2021, and in August 2022, it was 7.75%.

What can Small Businesses do now that ?

No matter how you slice it, small businesses are going to have to pay higher rates now than they would have at the beginning of the year for most types of financing. If you already have a variable-rate loan, such as a business line of credit, the first thing you want to avoid right now is drawing down that line of credit since you will have to pay a higher interest on any money borrowed. 

Try to Renegotiate

One action to consider is attempting to renegotiate the terms of your loan with the lender, especially if

rising interest rates Kapitus small business lending

Rising interest rates may force small business owners to renegotiate terms with their lenders.

rising rates will affect your ability to pay back borrowed money. 

Remember, if you declare bankruptcy, it will be a long and costly process for the lender to recover any borrowed assets from you, so that’s an option they generally want to avoid and therefore, they will most likely be willing to work with you on a realistic plan to modify your loan. One thing that you can use as a negotiating tactic: if your credit score has improved since you opened the line of credit, you can use that to try and notch a lower interest rate.

Be Selective

If your small business needs financing during this period of rising rates, try to select the lending product that generally offers the lowest interest rate: an SBA loan. While interest rates have risen for SBA loans, they still generally offer the best interest rates and most flexible terms. The downside is that in order to obtain an SBA loan, you usually must have an excellent FICO score as well as a strong cash flow and several years in business, among other qualifications.

If you are seeking a business line of credit, you may even offer to put up collateral even if you have an excellent credit history, as secured lines of credit typically offer lower interest rates since the lender is taking on less risk. Additionally, term loans are typically cheaper than other types of financing, such as merchant cash advances and equipment financing.

Consider Alternative Lenders

An alternative lender, such as Kapitus, may be a good solution for you if you are seeking financing. Alternative lenders typically offer faster approval with fewer requirements and paperwork, and many have upgraded their customer service over the years to offer personalized service. 

Additionally, higher interest rates mean that traditional banks will be tightening their lending standards and make it more difficult for small businesses to obtain a loan, so alternative lenders may be a more appealing option if you’re seeking financing since they typically have less stringent requirements for potential borrowers.

Remain Steadfast

While now is not a great time to seek financing, just remember: interest rates rise and fall over time, depending on economic conditions. The Fed is hiking the overnight rate to combat inflation, so the high interest rate environment won’t last forever. If you must seek financing, try to go with the products that offer the lowest costs of capital possible, and consider looking at lending marketplaces to make lenders compete for your business. 

Employee Retention Tax Credit Kapitus Small Business Lending accounting

Are You Still Eligible for Employee Tax Credits?

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Thousands of small businesses are checking to see if they are still eligible for the popular Employee Retention Tax Credit (ERTC). While the sun set for the ERTC in September 2021, there is still a chance to retroactively claim that tax credit in 2022, albeit through a somewhat lengthy tax filing process. If your small business didn’t take advantage of this tax credit at the height of the pandemic, you could still be eligible for free money.

Is Your Business Still Eligible?

According to the IRS, if you operated a small business in 2020 and 2021 you must demonstrate that your business suffered a significant loss of business or was forced to temporarily close due to COVID-19 and COVID-related government shutdowns, yet you still retained your employees (at least on a part-time basis), to still be eligible for the ERTC. 

You should have a conversation with your accountant to see if you still qualify for the ERTC, but generally, to satisfy IRS requirements:

  1. You need to still have your gross receipts from 2020 and 2021. Your receipts from 2020 and 2021 should show that your gross income was at least 50% below what it was in 2019, or
  2. Under the Consolidated Appropriations Act (CAA) of 2021, businesses (including nonprofits, hospitals, educational institutions and 501c organizations) that were affected by closures and government-mandated quarantines and experienced a 20% drop in gross receipts in 2020 and 2021 compared to 2019 are still eligible.
  3. Under the American Rescue Plan (ARP) of 2021, businesses can be eligible for the ERTC if their receipts reveal a 50% loss in gross income in 2020 in the quarter immediately following the quarter in 2019 – not just to the corresponding quarter in 2019.
  4. The CAA also extended the dates for eligibility for the ERTC. The legislation stated that small businesses can still use wages paid through Q3 and Q4 of 2021 to claim a refundable tax credit of up to 70% of the qualifying wages, with a maximum of $7,000 per employee per quarter. 
  5. The Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 originally did not allow for small businesses that received a Paycheck Protection Program loan to claim ERTCs, but the CAA changed that. Employees that received a PPP loan can still retroactively claim the ERTX for past quarters by filing Form 941-X from the IRS.

How do I go About Applying for the ERTC?

Eligible Small business owners should speak to their accountants first, and then can still claim the ERTC when filing quarterly taxes using Form 941 Employer’s Quarterly Tax Return for applicable periods. If an employer does not have sufficient funds to cover the credit (because Social Security and Medicare taxes must be paid in order to be eligible), they can receive an advance payment from the government by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19 to the IRS.

Don’t Throw Away Free Money!

Economic times continue to be uncertain for small businesses, even in the waning days of the COVID-19 crisis, so you can’t afford to give up chances for free money. Talk to your accountant to see if your business may still be eligible for the ERTC. You could get up to 7,000 well-deserved dollars per employee for doing your part to keep people employed during the height of the pandemic.

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What are the Best Perks to Offer Your Workers?

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Offering employee perks may be the best way to overcome the continuing worker shortage that small business owners are still feeling the brunt of, as increased demand for higher wages and competition with larger competitors that can afford to pay workers more continues. Roughly 47% of small business owners cited labor shortages as their biggest concerns right now in the most recent Small Business Optimism Survey conducted by the National Federation of Independent Businesses (NFIB), and most are at their wits end as to how to become fully staffed.

That said, the daunting questions small business owners face are: which industries are suffering the most in terms of employee shortages, and what benefits should be offered to keep employees happy?

Unsurprisingly, industries that employ the most hourly employees and typically offer relatively low wages with no health or retirement benefits seem to be the hardest hit, followed by typically high-stress industries such as health care and education that include frontline workers. 

Food Service, Retail hit the Hardest

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The food and hospitality industry continues to be the hardest hit when it comes to the labor shortage.

According to the latest report from the Bureau of Labor Statistics (BLS), the accommodation and food services industry had the highest quit rate in June at 5.7%, followed by retail trade at 4% and nondurable goods manufacturing at 3.2%. The business and professional services industries, which include health care and education workers, showed a 3.3% quit rate.

So, what can small business owners – especially the ones who can’t afford to pay their employees more than their larger competitors – do to attract and retain talented employees? The answer may be found in a single simple word: perks – job benefits that go beyond a simple paycheck. Different industries, however, probably require different perks, as a table server at a restaurant may be looking for different benefits than, say, a full-time paralegal at a law firm.

What are Employees Looking for?

Free pizza in the breakroom on Fridays and discounted gym memberships aren’t going to cut it anymore. The perks you offer to your employees – especially if you can’t afford to pay them more – need to be well thought-out and in line with what can make your specific employees’ lives better, and doing so will make your business less likely to be another victim of “The Great Resignation.” 

That said, it’s important to do your research on what workers are looking for from their jobs. If you haven’t, not to worry – we’ve done some of it for you. 

Aside from better pay, workers generally want a clear path to advancement and better work/life balance, according to Prudential’s 2022 Pulse of the American Worker study. The study also revealed what benefits/perks workers are willing to take a pay cut for: 45% of employees want benefits such as health insurance and retirement plans, while 27% said they would be willing to stay with a company if it gave them a flexible work schedule. Additionally, 25% said they would stay with a job if it offered a clear path for advancement.

A study of 52,000 employees around the world (including the US) by PriceWaterhouseCoopers found that 40% of respondents would stay at a job that “upskilled” their workers – providing them with on-the-job training for advancement. 

The American Psychological Association’s survey of more than 2,000 workers in the US found that 8 out of 10 workers said that mental health will be an important factor when considering a job offer. A survey by SHRM found that, aside from increased salary and health care benefits, increased paid time off, family benefits and flexible work hours are the perks most employees are seeking.

Here are some perks that are currently working:

#1 Minimum Essential Coverage (AKA Limited Medical) Plans. With the federal minimum wage for tipped workers at a paltry $2.13 per hour and $7.25 per hour for other hourly workers with no health or retirement benefits, it’s little wonder that hourly employees engage in frequent job hopping. If your small business is a restaurant or retail shop and employs hourly workers, a low-cost way to gain an advantage over your competitors is to provide a minimum essential coverage plan for your employees.

These are minimal health insurance plans that meet the standards of the individual mandate in the Affordable Care Act (also known as ObamaCare). Sponsoring these plans can come at a very low cost to employers, and they are offered through TRICARE, most Medicaid plans and Medicare, among others. They can also be extended to family members through Medicaid’s Children’s Health Insurance Program (CHIP).  

While these types of plans don’t offer great medical coverage, something is better than nothing for your employees.

#2 Unlimited Paid Time Off (PTO) Days. More companies today are offering unlimited PTO days to full-time salaried workers as an added benefit to assist in the mental health of their workers and to respect their desire for better work/life balance. Of course, this doesn’t mean that an employee can take six months off per year. 

It does mean, however, that if an employee does his or her job well and completes all of his or her assigned tasks, they can take approved PTO days without the hassle of having to clock in-and-out of a complicated HR system that tracks PTO days. It also gives employees peace of mind that they can take off for unexpected personal and family-related reasons. This is a benefit that can make the difference between your valued employees staying or leaving your business.

#3 Flexible Work Schedules/Work From Home. This one is obvious: office workers got a taste of

Work from home Kapitus Small Business Lending perks human resources

The ability to work from home for at least part of the work week is now a crucial perk to offer employees.

working from home during the height of the COVID-19 pandemic, and study after study has shown that installing foosball and ping pong tables in your office space isn’t enough to lure workers back to the office. Many employees are even willing to give up a higher-paying job offer if it means they don’t have to go through the daily grind of commuting. 

If your business does operate out of an office, offering at least hybrid work schedules in which employees must come in two or three days out of the week – or not at all – has almost become a requirement if you expect to retain your workers. To do this, your business should be willing to invest in remote technology and offer reimbursements for home office equipment. 

#4 Recognition Through Bonuses. Employee recognition can go a long way in keeping your best workers. Even if your small business is not a high margin one, a $250 or $300 bonus every quarter or on their anniversaries will tell your employees that you value their work and may be a crucial element in whether your employees choose to stay with your business or go elsewhere. These small bonuses may also be especially important for small businesses that employ hourly, low-wage workers.

#5 Discounted Mental Health Services. A lot of people – especially frontline workers – were traumatized by the COVID pandemic, and many remain heavily stressed about their families and loved

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Study after study has shown that helping employees with their mental health will go a long way towards preventing them from quitting.

ones even in the waning days of the coronavirus threat. The pandemic also made workers rethink their priorities in life as they became accustomed to working from home. 

In a recent survey from Lyra Health, 92% of US benefits leaders have prioritized mental health assistance for their employees. The pandemic also made workers refocus their energies on gaining happiness and fulfillment in their lives. That said, small businesses that offer assistance with mental health care can gain a tremendous advantage when searching for or looking to retain workers.

Mental health benefits don’t have to cost a fortune for employers. As a small business owner, you can contact a list of therapists in your area and arrange for discounted therapy sessions for your employees. You can also cover the cost of mental health apps such as Headspace and Calm for your workers to use.

#6 Paid Career Training. Workers don’t want to be stuck in dead end jobs, and if they feel like they are in one, they’re likely to leave. While this job perk may not apply to every small business owner, office-based small businesses should consider paying for online courses, or even sending someone to a trade school to learn new skills so that they can advance at your company. 

This doesn’t have to be a costly process – paying for an employee to take an online course in digital marketing, for example, may even be free. If you own a construction company, sending some of your laborers to carpentry school to learn how to work on unique projects can make a huge difference in whether you keep your valued employees. 

#7 Pet Insurance. This may seem like an odd perk, but it makes sense given that one in every five

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Since 20% of US households got a new pet during the pandemic, pet insurance is now a valuable perk for keeping your employees.

households acquired a new pet between 2020 and 2022. In a recent survey by Willis Towers Watson of 238 large US employers, 69% of employers said they will offer pet insurance in 2022 and beyond. 

This is a perk that has become especially important as more employees are working from home and – in many cases – only have their pets as companions. If you have a health insurance carrier, there is a good chance that they already offer some form of pet insurance. Some of the most popular insurers are ManyPets, Embrace and Pets Best.

Consider Employee Perks Software

While not for everyone, there is software out there that can assist certain small business owners in keeping employee perks organized and ensuring that the right employees receive them. Software from companies such as Motivosity, Fringe and Reward Gateway can help you to remember employee anniversary dates, calculate how much you need to spend on company perks and organize when payments are due for additional employee benefits. If your small business has 10 or more employees, this option may make sense for you. 

Perks are now Essential

Happy workers make for a better, more profitable business. In today’s hiring climate, perks should no longer be seen as extras, rather, they should be viewed as essential ways to retain your valued employees. Carefully research which perks make the most sense for your business, and which ones are the most cost-effective. Offering the right perks makes your business better, and may prevent you from having to constantly post “Now Hiring” signs. 

Small Business Owners Share How They’re Maximizing Labor Day Weekend

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It seems that small business owners are always at work, even during three-day weekends. While Labor Day weekend typically means one last trip to the beach or dip in the pool to mark the end of the summer season, it means something quite different for small business owners. Although the weekend is meant to commemorate workers, it usually spells opportunity for small business owners – and not just for additional sales. 

Kapitus reached out to scores of small business owners to see how they plan to maximize their three-day weekend, and, unlike most, the responses overwhelmingly involved a mix of work and play. Some plan to spend the weekend recharging and spending time with their families, while others said they will use the day off to knock out “to do” lists for their small businesses. For others, Labor Day weekend means getting prepared for the upcoming holiday season. 

Hybrid Work?

Many small business owners that Kapitus spoke to said three-day weekends give them a chance to both recharge and get some much needed chores done.

“I’ve found that a lot of people think they can’t do both—take time off and still get stuff done—but I actually find it helps me focus more than if I’m in the office all day long,” said Dmitriy Bobriakoz, co-founder and managing director at Solwiser. 

“When I’m working from home or at a coffee shop, I tend to be more focused because there are fewer distractions around me: no coworkers asking for help, no deliveries arriving unexpectedly. However, when I’m out of the office for a long weekend, I feel like I have more time to get my tasks done without feeling like there are any time constraints on them By using this time wisely and taking advantage of 3-day weekends whenever possible, it’s easy for me to stay on top of all my responsibilities while also enjoying some much needed downtime!”

Work-life balance is a myth, according to Laura Rike, a small business consultant.

Laura Rike, a self-employed consultant to small businesses, called work-life balance “a myth” for small business owners because they often have to multitask between personal and professional matters. 

“The idea, in my opinion, isn’t to seek a consistent work-life balance, but to be in a position where you can give more time and attention to different aspects of your life at different times,” said Rike. “Sometimes, if you have a launch or a super busy season, work is going to be more time-consuming. If your children are sick or you have family in town, then family may take more focus. It’s a matter of being in the position to leverage things so that you can be where you need to be most, when you need to be there. This could fall on a 3-day weekend, and require you to take your own 3-day weekend another time, when your attention, energy, and time are less critical to your business.” 

Laura Fuentes, operator of Infinity Dish, said that getting some much-needed rest and relaxation is important during a three-day weekend, but emphasized that small business owners can also use the time to get organized.

Getting organized and then shutting off from ‘work mode’ is the ideal way to maximize a three-day weekend, said Laura Fuentes, operator of Infinity Dish.

“As a small business operator, I’m almost always up against a deadline,” said Fuentes. “Three-day weekends can feel like an escape from those feelings but if you’re not doing anything productive all weekend, when the work days roll back around it can feel even worse. So, I take the first two days of a three-day weekend and I completely turn my brain off of work mode, don’t think about it at all! 

“Then on the third day, I spend at least a few hours dealing with work – Emails in particular. I like to get ahead on planning my week and doing a few hours of work just to catch up on anything that I couldn’t finish the week prior. Then after that, I close my work computer and go relax with my family because knowing when to be on and when to be off is the key to surviving business life.”

Here Come the Holidays!

Some small business owners told Kapitus that the Labor Day weekend officially marks the busy holiday season – one in which retailers and other businesses need to get their inventories ready and start promoting sales for specific holidays from Halloween to New Year’s Day.

“While the best thing for small business owners to do with the upcoming three-day weekend is get some rest, the second best thing they can do is start planning their holiday marketing strategy,” said Cain Twyman, owner of Twyman Consultations. “August is a great time to start planning your holiday marketing, but if you haven’t had the time yet this 3-day weekend for Labor Day is perfect to start! Take a few hours to map out your offers, plan your campaigns and give yourself the best start to the biggest ecommerce season for businesses.” 

Long-Awaited Tasks

Other small business owners said three-day weekends are best used to tackle to-do lists and to complete tasks that they simply don’t have time for during business hours. For example, Doug Spencer, co-founder of Bold Xchange, said Labor Day is a valuable time to focus on marketing and sales tactics.

Doug Spencer, co-founder of Xfinity Exchange, said a three-day weekend is the perfect time to think creatively about your small business.

“At Bold Xchange, packing and shipping corporate gift boxes is a core function of our business. Our logistics partners are closed on most Monday holidays,” said Spencer. “These are special, rare opportunities to shift our focus from the physical products we sell to the experiences we create for companies and teams across the country. We take these days to do the creative thinking and planning that can be hard to squeeze in between daily shipments and deliveries.”

Shaun Connell, founder of Credit Building Tips, said that Labor Day and other holidays are great chances for some quiet time to brainstorm ways to improve business.

“I like to take advantage of three-day weekends by planning creative strategies for my business, as I find during holidays you feel more relaxed and at ease to be able to do so,” said Connell. “I use my time wisely to create new marketing strategies, keep up with trends via social media, as well as re-look at my overall business goals to see if I am on track. There are less obligations to be met over a three-day weekend which is why finding creative business ideas is easier, as you can focus and do so in a more relaxed way.” 

Freeman Smith, founder of NuFactor, echoed Connell’s sentiments. “Holidays are the best day to put your head down and work without having to respond to emails,” he said. “I’ll be spending Labor Day migrating our business to a new CRM. This is something I’ve wanted to do for a long time, but it is difficult to do when our team is utilizing the existing CRM to speak with customers.”

All Work

Unfortunately, while most people enjoy a rare Monday off, a long weekend means extra hustle for some small business owners, especially since local shoppers will have an additional 24 hours to purchase products. However, despite working on holidays, three-day weekends give small businesses a chance to connect with their local communities.

“The best market to leverage in the early stages is the local market,” said Adam Kremer, owner of Royalty Renewables. “Every three-day weekend throughout the year is jam-packed with events. Local communities come together to see one another and enjoy outdoor activities with their friends and family. It can be brewery beer bash, fourth of July fireworks, labor day cookout, or even a fair. These events have all the paid advertising done for you and many allow for vendors to take part…You get the perks of face-to-face communication where you can build relationships with countless residents local to you, which can create easy return business if you have a local shop or perform a service for homeowners.”

You Also Need to Recharge!

Thankfully, Kapitus did speak to small business owners who “turn off” work during three-day weekends to get some much-needed family and rest time.

“A three-day weekend is ideal for spending quality time with family and friends,” said Laura Kinkar, CEO at Messente. “It isn’t easy to devote your undivided attention to your loved ones during the week, especially when you have a lot to do to accomplish everything you need to finish at work. However, with a long weekend, you have enough time to disconnect from technology and get adequate sleep, and you still have time to go on a weekend getaway with your loved ones to a destination that’s an hour away from home. The three-day weekend will surely recharge your batteries for the upcoming week.”

Enjoy the Long Weekend!

Burnout is very real, especially among small business owners who have to wear multiple hats and constantly take work home with them. Whether you’re going to be at work, play, or a combination of both, make sure to take some valuable time off during the holidays to get some rest and enjoy time with families. Enjoy the weekend!

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Tips for Making Free Shipping Sustainable for Your Small Business

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Ecommerce businesses have comparably little power when working to convince a customer to make a purchase than traditional, brick-and-mortar storefronts. While traditional storefronts can turn on the charm and work directly with customers as they use their basic human senses of sight, touch, hearing, smell and/or taste to select products, ecommerce businesses usually depend on the strength of a visual representation of their product alone. This means that price likely plays one of the most important roles in making digital sales. Google and other browsers’ built-in tools also make it incredibly easy to compare hundreds of similar items at once, making the lowest overall price often the most attractive. Enter, free shipping. Services like Amazon have made free shipping a standard for Prime members, and further, a general expectation from consumers. Free shipping is one the very few incentives available for ecommerce companies and effectively leveraging free shipping can have a tangible impact on your sales. Of course, simply adding the price of shipping onto the base charge of an existing item is not a sustainable option; as explained, comparing similar items online is so simple and impersonal that items with factored in shipping have the very high likelihood of being glazed over by most general web “window” shoppers. Consider, then, this list of tips and strategies to work free shipping into your existing business structure. No matter the size or scope of your existing business, evaluating your ability to offer free shipping is a great starting point for larger money-saving conversations to have with your staff.

Options and Limits

Options: Where feasible, consider giving customers multiple shipping options, the most basic of which ought to be free. For example, if you are shipping through the USPS, all orders which ship as a First-class Parcel may be free while customers can also choose Parcel Select for an upcharge. The most effective buy pages also estimate how many days each option will take to deliver. Having a shipping time estimate is a major factor in convincing a customer to complete an order. But depending on whether or not you are partnering with an ecommerce provider like Shopify with easyship, estimates will likely be pre-calculated.

Limits: Depending on the size and overall cost of an order, consider setting clear parameters where and when free shipping is sustainable for your business and use the info to guide what products or overall orders can qualify for free shipping. For example, a very common limitation for free shipping is only allowing domestic orders under a certain weight or size. Look at your existing products and shipping methods and set a baseline for free shipping. Orders under a certain weight qualify for free shipping where reasonable. Businesses interested in trying limit-based free shipping will likely need to evaluate which shipping services they are already partnered with, which leads into our next idea.

Event-Based Free Shipping

An effective way to get customers excited about free shipping is offering it during a limited time or a seasonal deal. By making free shipping an incentive, you may also drive in new sales. Sit down with your team and find out what types of seasonal promotions make sense for your industry and current scale. A possible concern, however, of running a seasonal or event-based free shipping promo is making less on each sale. Consider, then, cutting some creative corners during these promos. For example: if you traditionally use cardboard for shipping, consider ordering cheaper bubble mailers specifically for those promo orders. There are millions of creative ways to cut down on prices from your end. But the name of the game is making sure customers feel and comprehend that they are taking advantage of a timed-special by making an order during your promo.

Coupon Codes

Browser extensions that aggregate coupon codes like Honey have exploded in the last 5 years with more than 10,000,000 downloads on Google Chrome alone. Extensions like Honey pause buyers at checkout pages and scan their own systems for any relevant and active coupons. Here’s the trick: businesses can work directly with coupon extensions to create special promo codes. This means that you can create a special free shipping coupon code and distribute that code to a coupon extension along with specific parameters for when that coupon code is allowed to be added to checkout. For example: your coupon code can easily be configured to function only when a customer’s cart has more than $50 worth of merchandise, or whatever figure makes free shipping financially reasonable for such an order. Coupon codes, like seasonal promotions, incentivize customers to follow through on an order because they understand they are getting a deal that either not everyone else is privy to or that they may not be able to use in the future. The purpose of the coupon, however, is to grab customers with last minute cold feet as well as a means to offer free shipping in a less than universal way.

Bundles and Bonus Items

For most businesses, larger orders equal wider margins and more wiggle room for free shipping. By having a customer buy more items and spend more overall on their order, it is much more likely that your business can support offering free shipping as a further incentive. A great way to do this is creating presorted bundles or adding in upselling bonus items for each order. Do the math ahead of time and find out what products at what price point would both equal a deal for your customers and widen your margins enough to allow free shipping. Alongside full bundles, maybe consider adding a small bonus item for a small upcharge. In that upcharge, however, you may have enough space to make free shipping less of a financial hit. For example: if an existing item costing $30 has an upcharge bonus option for an additional $10, perhaps that bonus item will also activate free shipping making it appear as a doubly good deal to customers. Of course, this example will only work if you can both keep shipping dimensions similar with or without your chosen bonus item.

Free Shipping is Never Free

And customers know this too. Trust your customers to understand that the price for shipping must be factored into their order in some way. Depending on your industry and where you ship your merchandise, free shipping in its most traditional form may very well be wholly unsustainable. Through any of these tips, however, it is entirely possible that the SEO and psychological advantages of free shipping are still available for your business.

The Importance of Separating Business and Personal Expenses

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Overpaying on your taxes or getting audited by the IRS aren’t fun prospects for you or your small business, but those are two scenarios you could face if you don’t have the discipline to separate your business and personal expenses. 

While separating these expenses sounds easy enough, it can get complicated, especially if you operate a pass-through business such as a sole proprietorship, limited liability Corp. (LLC), partnership or S corporation and are taxed as an individual rather than a corporation.

Commingling your business and personal assets could also get you into trouble if your business is sued, and you may face personal asset exposure in such a scenario. The IRS also demands stringent records of business expenses at tax time, so if you’re keeping your business receipts in a shoe box, you could face tax penalties at the end of the year or end up missing out on tax deductions because you paid for business expenses from your personal account and forgot about them.

The good news is that with some planning and discipline, there are definitive steps you can and should take throughout the year to separate those expenses so you won’t be facing major headaches at tax time.

#1 Get Your Paperwork in Order

If you haven’t done so already, declare the type of business you are with the IRS, be it a sole proprietor, LLC partnership or an S Corp. Doing so will affect how you pay taxes, your legal and personal liability, and your ability to raise capital. Becoming an LLC or an S corp. gives your business a distinct legal identity and separates you from your business’ shareholders, if you have any.

Additionally, create an Employee Identification Number (EIN). Much like a Social Security number, this is a unique, nine-digit identification number that allows you to conduct tax-related business and open bank accounts in your business’ name, thus making it easier to separate business and personal expenses. 

#2 What’s the Difference?

Before you even start, you need to understand what a business expense is and when the best time is to take a deduction on that expense. Like with most things, the IRS is not very helpful in identifying a business expense. 

“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business,” according to the IRS’ website.

While many business expenses are obvious, such as the costs of business travel and office equipment, you should consult with an accountant or attorney on other expenses of which you may not be sure. For example, if you set up a home office in addition to your place of business, or if you buy your best client an expensive birthday gift, you may need to be creative in justifying those as business expenses. 

#3 Get Payment and Expense System Software

Business personal expenses lending small business Kapitus

Software such as Expensify can help you easily separate business and personal expenses.

You can create a business expense system on a spreadsheet program such as MS Excel or Google Sheets. However, If you have a number of employees that are all filing business expenses, you might want to turn to expense tracking software that can make the job fairly easy. Some of the most popular software packages out there include Intuit QuickBooks, Emburse Abacus and Expensify. 

Most of these software packages make it easy to identify expenses as business and personal, and most will allow you to process payments directly into accounts that you’ve set up specifically for your business and will make it easy to amortize payments and expenses (spread them out over multiple years) if you and your accountant deem it beneficial to do so. Of course, it’s crucial that you maintain the discipline to record your expenses as soon as you can so that you don’t forget to do so.

No matter what program you are using, whenever you record a business expense, you need to note the date and time of the expense, separate the cost of the expense from the tax you paid on it, and file the receipt. Most importantly, you need to explicitly state how the expense relates to your business. 

#4 Open Business Accounts

Once you’ve received your EIN, you should open a checking and savings account in the name of your business. Doing so will create an efficient way to separate your personal and business expenses by having them in two separate accounts. Having accounts in your business’ name will allow for transparency in business activities and expenditures, as well as make it easier to file taxes at the end of the year and check on your business’ financial health.

Having business accounts, however, does not mean you can stop itemizing your business expenses, as you will still need to explain to the IRS how those expenses relate to your business. Additionally, having business accounts will require you to be disciplined with your personal finances as well, as it may be tempting to withdraw funds from your business account if you suddenly find yourself with a large personal expense, such as unexpected medical bills or home repair projects. It’s important to talk to your accountant about the process you need to go through and the tax implications if you need to withdraw money from your business account for personal reasons.

#5 Get a Business Credit Card

Small business credit card lending Kapitus

A small business credit card can help you separate business and personal expenses, as well as prevent you from maxing out your personal credit cards.

Most small business owners need a tolerable amount of debt to operate, and there are expenses such as purchasing small pieces of office equipment and paying for business meals that can be conveniently financed with a business credit card. Having a business credit card will not only allow you to more easily separate business and personal expenses, it will also prevent you from maxing out your personal credit cards on your business, thus eliminating the risk of hurting your personal credit score if your business expenses pile up. 

Business credit cards sometimes carry lower interest rates than personal ones depending on your credit score, and many offer perks like travel rewards. Some even carry no annual fee. Before you apply for one, you should shop around for the best possible rates and rewards.

#6 Pay Yourself!

How you pay yourself as a small business owner can have both personal and business tax implications. Even if you’re a pass-through business, you may want to put yourself on the payroll if you have more than one employee and have a payroll system already setup. When you put yourself through your company payroll, personal income tax will automatically be deducted from your paycheck, saving you a headache when you file your year-end taxes. If your company has an especially strong year, you can pay yourself (and perhaps your employees) an annual or quarterly bonus to make sure that you are rewarded.

The one factor to be wary of when paying yourself as an employee is the IRS’ Reasonable Compensation rule, which states that an owner must be paid a salary comparable to others in the same industry and with the same job. 

You can also pay yourself via an owner’s draw, in which you withdraw money from your company’s profits on an as-needed basis throughout the year. This type of salary will probably give you more immediate cash throughout the year, but you will have to pay taxes on those withdrawals at the end of the year.

Should you File Separately? 

The question of whether you should separately file your business and personal taxes depends on what type of business you own. The IRS views pass-through businesses, such as LLCs, and their owners as a single entity, so in most cases, you wouldn’t need to file separately. Some multi-employee pass-through businesses, such as S corporations, partnerships and C corporations, do require separate filings, so it’s important to speak with your accountant on which action would be best for you. 

Be Careful!

Separating business and personal expenses throughout the year requires discipline and attention to detail. You may want to invest in a small filing cabinet and separate your business receipts into categories, as well as find time to properly record them. Taking these steps while consulting with your accountant or financial advisor throughout the year will save you a very complicated headache at the end of the year, and prevent you from overpaying on taxes because you missed out on business deductions.

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