How to build business credit, and why it’s so important!

A strong credit score can make all the difference on whether your business qualifies for financing. But while business owners typically understand how to manage personal credit, they may not realize they can also build business credit under a separate report. Not only does this make it easier to borrow money and at better terms, it can also protect your personal finances. Here’s how.

What Is a Business Credit Score?

A credit score is a three-digit number that represents how safe or risky someone is to borrow money, based on their past behavior. Someone with a high score has paid their bills on-time whereas someone with a lower score may have maxed out their credit cards or missed payment deadlines. If you need help remembering deadlines, check out how to put banking and credit card alerts to work.

You develop a personal credit score based on loans in your private life like your mortgage, student loans, car loans and credit cards. But if you own a business, you can also build credit under its separate tax ID number, called an Employer Identification Number (EIN). If you don’t already have one, you can apply for an EIN with the IRS.

Then when you apply for a loan or credit card, you can request to borrow under your EIN instead of your Social Security Number. This will create a new business credit report prepared by the rating agencies Dun & Bradstreet, Experian and Equifax.

Financial Benefits of a Business Credit Score

When you apply for a loan, the lender could ask if you have a business credit score. While you may qualify without one, having an impressive business credit report will help your chances.

A stronger application can also lead to lower loan interest rate. Since business loans can be for such a large amount of money, even a slightly lower rate could mean big savings. For example, if you’re looking to borrow $2,000,000 for your business, just a 0.5% reduction in the rate saves you $10,000 of interest per year.

Finally, a strong business credit score can help you negotiate better terms with your suppliers, like you have 30 days to pay for equipment and inventory rather than paying 100 percent on delivery. Once again, these trades terms are more common for businesses with established credit.

Protecting Your Personal Credit

When you build small business credit, you also protect your personal finances. Part of your personal score is based on how close you are to maxing out your credit cards each month.

If you’re running business expenses through a personal card, you could get close to maxing out each month which can hurt your personal credit score. This would make it more difficult to qualify for mortgages, car loans and other types of loans in your personal life. Setting up business cards or a line of credit keeps things separate.

Another benefit is that once your business credit history is strong enough, lenders may be willing to set up future loans completely under your business name, so you don’t have to secure the loan personally. This means that in the worst-case scenario when you can’t pay off the debt, the lender could only go after your business assets for repayment. Not your personal savings or belongings.

Building Your Business Credit Score

Chances are, you will not be able to take out a standalone bank loan for your business without an established credit history but there are other easy ways to build up your score. One option is to take out a business credit card under your EIN and pay off the balance each month. Every on-time payment adds points to your score.

You could also take out a short-term cash flow loan from an alternative lender. These loans are easier to qualify for since these lenders make decisions based more on your past business revenues and less on your credit history. You can use the loan to grow your business and develop business credit history at the same time.

One other option is to use equipment financing to buy a new asset for your business. These loans are secured by the equipment.  Therefore, once again, your chances of qualifying are better, even without a high credit score. And making the loan payments will build small business credit.

Even if you don’t need to borrow money for your business now, consider using one of these strategies to start building up your business credit score anyway as it does take time. By taking action now, you’ll be in a strong position to borrow when your business does need money in the future.

6 Business Alternatives for Bank Loans and When They Make Sense

Borrowing money is an essential part of building a small business. But when you need a loan, traditional lenders like the bank might not be an option. They tend to have strict small business lending standards. For example, you need established business credit, collateral and detailed financial statements for bank loan approval. This is a difficult hurdle for companies that have only been around for a couple years.  Fortunately, as a business owner, you have other options, with a number of business alternatives for bank loans on the market today.

These alternative options can be your financing lifeline until you build enough of a financial track record to qualify for more traditional financial products.

Let’s take a look at these business alternatives for bank loans and when they make the most sense.

1 – Online Loans

Banks aren’t the only ones lending money. Alternative and online lenders are also a quality source of small business financing. They offer stand-alone cash flow loans that you can invest into your business and spend however you choose. If you want more flexibility, you could also open a line of credit.  A line of credit lets you borrow, pay the money back and re-borrow again as many times as you want.

It’s easier to qualify for loans from alternative lenders because their requirements are not as strict as with banks. Another advantage is you often don’t have to secure the loan with your future business revenue or other collateral. However, your business will need to meet some standards like stable revenue and a good business plan for how you will use the loan proceeds.

Best fit for: A business with stable revenue looking to borrow cash quickly, without putting up collateral.

2 – SBA Loans

Another way to borrow is through the Small Business Association. This government organization assists small business owners and one of their services is to help them qualify for loans. The SBA doesn’t actually lend money. Instead they agree to back a certain percentage of the loan, guaranteeing repayment to the lender. This makes the lenders more likely to accept your application.

SBA loans can be a great tool provided you can qualify. The process does take time and you’ll need to submit, at minimum, similar documents that you would include as part of a bank loan application – such as a business plan, bank statements and your credit report.

Understanding the SBA system can improve your chances of qualifying so be sure to work with a lender that regularly works with these types of loans.

Best fit for: A business that can meet the SBA standards for a loan and also knows a lender that understands the application process.

3 – Equipment Financing

If your small business needs money specifically to buy a new piece of equipment or machinery, then equipment financing could be the answer. These small business loans can only be used to buy an asset, which also counts as the loan’s collateral. This makes it easier to qualify because if you end up not paying off the debt, the lender can take back the equipment as repayment.

With this type of financing, you can often buy new equipment with no money down but you’ll still receive the full tax break for the business investment, as if you bought the equipment with cash. You can also set up the financing as a lease which would let you replace the equipment earlier with new versions as they come out.

Best fit for: Buying or leasing new equipment for your business.

4 – Purchase Order Financing

A lack of cash can put even thriving businesses in trouble. 52% of small business owners had to forgo a project or sales worth $10,000 because of insufficient cash, according to an Intuit Quickbooks survey (slide 2). If you’ve got a project lined up but need some extra money to make it happen, purchase order financing could be the answer.

These short-term loans cover up to 100% of your supplier costs if you can show that you’ve got an order that will turn things around. Once you make the sale, the lender will deduct their fees from the proceeds. That way you still fulfill your order without taking on any extra debt. And since you can prove that you’ll be able to pay the money back quickly this financing is easier to qualify for. You just need to prove the upcoming purchase order.

Best fit for: When you’ve almost completed a sale and need a quick cash infusion to reach the finish line.

5 – Invoice Factoring

After you make a sale, your job still isn’t done because you you’ll need to collect payment. This can take between 30 to 90 days, depending on your payment terms.  And, as many know, it could take even longer when customers miss payment deadlines.  Not to mention there’s always the risk they don’t pay.

If your invoices are piling up and you need cash, invoice factoring could be the solution. You transfer over an unpaid invoice to a financing company, called the factor, and they’ll give you an advance on the payment.

From there, the factor takes over collecting from your clients. Once they get paid, they’ll give you the rest of the invoice amount minus their fee, which could be as little as 1.5% of the invoice amount.

Best fit for: A business with unpaid client invoices that wants to improve cash flow.

6 – Revenue Based Financing

Revenue based financing is the last of our business alternatives for bank loans. These loans have a simplified and fast application process, a great solution if your business needs money now. Lenders can approve this financing quickly because they just look at your historic revenue and how long you’ve been in business. They use this to forecast your future cash flow.

Based on that, they’ll give you a lump sum of cash. The lender will then collect a set percentage of your future sales on a daily or weekly basis.

Best fit for: A business with a proven history of revenue that needs money but does not want to go through a lengthy loan application process.

Don’t let a bank loan rejection discourage you from raising the money your business needs. As you can see, there are plenty of alternatives. If you have any questions to figure out which of these solutions is the right fit, reach out to a loan specialist today.

Marketing and Public Speaking as Tools for Your Small Business

The combination of marketing and public speaking has proven immensely successful for a great many small business owners. Standing before a “live audience” is an effective way of building greater brand awareness and impressing a whole new crop of prospective customers.

In other words, done right, marketing and public speaking is a win-win for all involved.

How does becoming a public speaker benefit a business owner?

  • Public speaking demands that an individual analyze his or her proposed content and mold it in ways that emphasize clarity, originality, and concise speech. Being able to thoroughly prepare beforehand, and then making time adjustments in a presentation while standing before an audience, can enhance one’s abilities with respect to making sales calls, negotiating deals, and crafting a new, more imaginative approach to marketing.
  • Public speakers project confidence and powerful self-esteem. These traits inspire trust and faith in those around them, as Upwork notes: “When you speak with more conviction, it may encourage employees, customers, and other supporters to remain passionate and dedicated to your company.”

How marketing and public speaking go together

As you embark on a public speaking venture, you’re also developing new ways to market your small business. For example, as you put together a presentation based on your unique experiences and expertise, you can identify groups that would benefit most from your efforts. Your target audience likely has a calendar of events (conferences, tradeshows, etc.). It’s up to you to locate and identify these groups and events and begin to establish your credentials as a sought-after presenter.

You also learn to tailor your speech to emphasize what’s in it for the audience, rather than making the presentation all about yourself.

“You can’t just give an hour-long sales pitch,” notes Small Biz Triage. The key is identifying a topic “that is useful for audience members, yet related to your business so that they will see you as an expert in the field.”

Other tips to keep in mind as you prepare for your public speaking gig:

  • Use anecdotes or interesting personal experiences to “sneak” a mention of your business into the presentation.
  • Always supply materials audience members can take away from the event. These can range from brochures and fliers to printed slides or samples of your products. Just be sure everything you provide is sufficiently branded (i.e., includes contact information and link to your website.)
  • Distribute a sign-up sheet to audience members. This is a great way to gather potential new leads for sales calls. Just make sure that, in exchange for asking for peoples’ contact information, you offer an appealing incentive, such as free delivery of your company newsletter, a “how-to” sheet addressing some problem common to audience members, a prize drawing, and/or a way to get a discount on your product.

Honing your skills as a public speaker

Some individuals come to public speaking naturally. For most of us, however, this can inspire fear and an overwhelming sense of vulnerability and exposure. It doesn’t have to be that way. Keep these tips in mind as you hone your public speaking skills:

Practice! Regardless of your topic or the length of your scheduled presentation, the only way to really become good at this is through practice. Deliver your speech to a group of friends or family members. Ask them to closely evaluate specific elements, such as:

  • Pace of your delivery (too fast? too slow?)
  • Body language (posture, hand gestures, etc.)
  • Content (how interesting is the topic, where does it fall flat)

Their constructive feedback will help you improve your presentation and move closer to the real thing.

Memorize as much as you can. It’s OK to have notes or an outline on paper in front of you as you speak. But reading from a prepared text is perhaps the biggest mistake a public speaker can make. Your hours of practice should help you be prepared to simply talk to your audience, as if you were engaged in a conversation with them.

Anticipate questions and have answers ready. Speaking of conversation, a good speech includes a brief Q&A session afterwards. As an expert, you have a good idea what questions people are likely to have. Be ready with satisfying and informative answers.

A strong public speaker helps boost awareness of his or her brand. It also makes an indelible impression on people that here is someone who knows his or her business, and might be worth exploring further when the need arises for what products or services the speaker is offering.

Small Business Management Lessons from Gordon Ramsay’s Kitchen Nightmares

Gordon Ramsay is a world-renowned celebrity chef who is perhaps best known in the U.S. for his high-octane cooking contest shows like “Hell’s Kitchen” and “MasterChef” – but he made his big breakthrough as a TV personality on a show called “Kitchen Nightmares,” a show that’s not just about restaurants, it’s about the right way to handle small business management.

In each episode of “Kitchen Nightmares,” Chef Gordon Ramsay tries to rescue a failing restaurant. He battles everything.  From indifferent owners, to stubborn or incompetent chefs.  To filthy kitchens and unsafe food handling practices. And overly complicated restaurant concepts with fussy menus and doomed marketing. Some of the “Kitchen Nightmares” have a happy ending.  But others end up going bankrupt despite Ramsay’s best efforts. No matter the industry you’re in, whether it’s restaurants or any other type of service business, there are many inspiring lessons about small business management in this show.

Here are a few of the biggest small business management lessons from Ramsay’s “Kitchen Nightmares:”

1. Have high standards for your business.

Many of the restaurants that call Gordon for help are struggling because the owners have fallen into a state of learned helplessness.  They are making all kinds of mistakes.  Some are in over their heads. They’re losing thousands of dollars per week. They’re risking bankruptcy and the loss of their homes and life savings.

A good restaurant is supposed to be buzzing with energy, but too many of the restaurants on “Kitchen Nightmares” are looking lifeless; they’re pushing out sad-looking plates of food to empty dining rooms. Many of the business owners and their employees look rudderless and oddly passive.  They’re defeated; like they don’t know or care anymore how to run a successful business.  And they’re just waiting for the bankruptcy filing to happen. You can see the failure and desperation in the air.

Gordon shows the business owners how to re-establish standards and re-claim their pride. “This is your business!” he says again and again. Sometimes it feels like Ramsay is the only one in the building who really cares.

2. Hire well – and fire when needed.

One of the most important ways to set a positive example in small business management is to hire great people – which is easier said than done! Lots of restaurants on “Kitchen Nightmares” are being dragged down by bad employees who have poisoned the culture of the company: arrogant chefs, incompetent restaurant managers, feuding executives who can’t agree on a shared strategic vision.

Hiring great staff for your restaurant or any other business is not always easy, but it pays to get it right. And don’t be afraid to fire a toxic employee before they drag down the morale of your entire team.

3. Simplify your strategy.

Many of the failing restaurants on “Kitchen Nightmares” have a bad, confusing concept. They’re offering pretentious food. They’re trying to serve multiple types of incompatible cuisine and doing none of them well. Or, their menus are otherwise overly complicated or outdated. Gordon shows them how to simplify and improve the restaurant menu and create a few signature dishes that the kitchen can prepare quickly and profitably at a higher level of quality, while often saving lots of money on food and overhead costs.

What’s the lesson for your business? Are you trying to do too many things, trying to be all things to all people? What if you could simplify your menu, and just offer the services or products that you can absolutely do best?

4. Your business is your livelihood – make it your passion.

On “Kitchen Nightmares,” Gordon Ramsay goes into restaurants that are facing dire situations and tries to find something to salvage – but often, it’s too late. The rot has set in, and the business has already lost too much momentum and squandered too much goodwill with customers.

Often, when a “Kitchen Nightmares” episode has a happy ending, it’s because there is a change of attitude at the top: the business owner needs to set the tone for the culture of the entire company. If the business owner cares deeply, has passion for the business, attends to details, and maintains high standards, then the employees will follow that positive example.

As a business owner, it’s easier to keep positive momentum going than to dig yourself out of a hole. This is why “Kitchen Nightmares” is so inspiring: it’s a reminder to business owners to keep the passion alive in their businesses, keep showing up, keep caring, and keep trying to make a difference every day for your customers.

Should I Stay a Sole Proprietorship?

Sole proprietorships account for the largest number of businesses in the United States. According to the most recent data from the Internal Revenue Service, nonfarm sole proprietorship tax returns totaled approximately 25.5 million. For comparison, C Corporation tax returns were around 2 million.

While extremely popular, every small business owner eventually has to answer the question: Should I stay a sole proprietorship or should I incorporate?

Sole proprietorships have several advantages, but they also come with a few significant disadvantages. Let’s run through both so you can make your own pro/con list to help you make the decision on whether or not to incorporate.

Advantages of Being a Sole Proprietorship

Simple to create– The business can operate in the owner’s name or a fictitious trade name. Creating a trade name only requires filing with the local government authority and obtaining the necessary business licenses.

No formal filings – Sole proprietorships do not need to hold corporate meetings, keep minutes or file annual reports. If you just start running a business – a landscaping business for example – you’ve become a sole proprietor without having to notify any government authority.

Owner control – The owner in a sole proprietorship has 100 percent control and makes all the decisions.

No unemployment tax – The owner does not have to pay an unemployment tax on himself. However, payment of unemployment taxes are required if the business hires employees who are paid regular wages.

Can comingle personal and business funds – Since the owner and the business are the same, one checking account can be used for both business and personal transactions. Although a single checking account is allowed, it’s still a good idea to separate business and personal transactions.

Owner keeps all profits – A sole proprietorship only has one owner;  and the owner reports all profits from the business on his/her tax returns.

Disadvantages of Being a Sole Proprietorship

Personal liability – The owner is personally liable for all the debts and contractual obligations of the business. This liability is unlimited. An owner could lose all business assets plus personal assets in the event of a loan default or adverse ruling from a lawsuit. The risk of losing a home, car, savings accounts and other personal possessions is the most serious disadvantage of a sole proprietorship.

Difficult to raise capital – Sole proprietorships cannot raise capital by selling shares of stock or interests in the business to attract outside investors. A business that needs to attract more capital to support growth will have to convert to a corporate form.

Harder to get bank loans – Banks prefer to make loans to companies with several years of business credit. Sole proprietorships must rely on the creditworthiness of the owner.

Survivability– Sole proprietorships rarely survive the death of the owner. Since the business is usually run entirely by the owner, there is hardly ever any management level person to take over the business. It simply ceases to operate.  However, with advance preparations, a business owner can pass on the business to their heirs.


Filing a tax return for a sole proprietorship is fairly simple. The only requirement is for the owner to include a Schedule C with the personal tax return.

Schedule C is a summary of the business’s income and expenses. Losses shown on a Schedule C can be offset against other income the owner might have from other sources.

Should I Stay a Sole Proprietorship?

As a business grows, the owner will eventually face the decision of whether to incorporate or stay a sole proprietorship.

The main issues that affect this decision are liability risk and the need to raise funds.

When a business starts to borrow money to expand or finance growth, the risk to owner’s personal assets goes up. If you find yourself in the situation where you need to raise capital to expand or for growth support, then that is the time to consider the change. In addition, if you are in the situation where you need to begin adding employees, you should consider incorporation. Employees can come with their own host of liabilities and incorporation can help you manage that risk.

Because they’re simple to form and don’t require filing complicated legal documents, millions of business owners use sole proprietorships to get started. But, once they begin to grow – and risks to personal assets begin to increase – it’s time to ask yourself the question: Should I stay a sole proprietorship? The answer: looking into incoporation is the right next step.

9 American-Made Ways to Enhance Your Summer Celebrations

If your 4th of July weekend plans include a cookout, fireworks or a parade, you’ll have plenty of company!

In its annual Fourth of July consumer survey, the National Retail Federation found that 86% of Americans expect to celebrate the holiday this year, with 61% planning to enjoy a barbecue or picnic, 40% looking forward to a night of fireworks and 11% intending to go to a parade.

As your activities for the long weekend evolve, consider enhancing your patriotic spirit with these American-made products:

To set the tone for the weekend, All USA Clothing offers an assortment of red, white and blue clothing and apparel, including t-shirts, socks and a flag tote bag.

To further show your true colors, Valley Forge Flag, a supplier to the U.S. government, carries a variety of American flags.

Since it’s July, you’ll likely be spending some quality time in the sun. Don’t forget that regular applications of sunscreen will help keep your skin healthy, and Babo Botanicals offers an American-made option.

If you’re inclined to make a little noise yourself, check out the various fireworks at American Fireworks. While state regulations restrict the shipping of some products, others may be shipped nationwide.

To be the hit of the cookout, pick up a portable stainless steel All American Grill from General Welding & Fabricating.

From your backyard to the neighborhood park or your in-laws’ deck, a fun Fourth depends heavily on keeping your hot dogs and burgers cool, the coleslaw crisp and the beverages ice cold. Cordova Coolers offers a selection of hard and soft coolers to do just that.

If you’re one of the 14% planning Independence Day travels and some camping is on the docket, consider keeping your campsite illuminated with a rugged lantern from iconic fire starter Zippo.

When that lull in the festivities hits just prior to the fireworks display, keep the fun going with a favorite card game, using an appropriately themed deck from the Bicycle playing card company.

Let’s be honest, celebrating can be hard work. To catch some Zs in comfort and style, The Original Hammock Shop crafts hammocks and island swings for most settings.

Regrettably, Independence Day Weekend 2019 will end, but these American-made goods will help stir the memories of your fun and festive celebration throughout the rest of the summer and for many years to come.


The Best Free Online Productivity Tools For Small Businesses

With the prevalence of digital productivity tools, you might expect businesses to be more productive than ever before. Yet, many business owners still list “improving productivity” as a top concern. Since new tools are coming on the market every week, business owners could find themselves wasting considerable time and money trying out option after option to find the tool that best meets their needs. To help cut through the clutter, we’ve assembled a list of the top 5 most versatile free online productivity tools for small businesses.

1. Wave



Regardless of your business structure, number of employees, and industry, you’ll need a way to track your business finances. Wave empowers small business owners to handle all aspects of their business funds, including building financial statements, sending invoices, processing payroll, reconciling bank statements, tracking income and expenses, accepting credit cards, and more. Even better, this freemium service offers personalized bookkeeping and accounting advice from professionals for a nominal fee.

2. MindMup


Source: Mind Map Facebook

As your business grows and evolves, you’ll need to keep on pace with new ideas for marketing, business development, and lead generation. Mind mapping tools were created for just this purpose, but MindMup is no ordinary mind map. Unlike many free services, MindMup doesn’t limit the number of maps you can create with their free plan. You can include photos, videos, spreadsheets, and other media directly into your maps.  You can also upload finished projects to the cloud for easy sharing.  In addition, you can download projects into a variety of formats, including PDFs and PowerPoints. Perhaps the best quality of this productivity tool, however, is its intuitive interface that allows you to quickly and easily capture all your ideas during brainstorming sessions.

3. Toggl



The creators at Toggl understand a fundamental truth about tracking time for small business owners – it is a necessary evil. They designed the browser-based app with a large timer button; toggle it on to start the timer and toggle it off to stop timing. If time tracking gets much more complicated than that, people won’t use it consistently. For users that want an easy-to-use application that still allows for some customization, there are simple point-and-click tagging features that allow for categorization by client and by project type. The Toggl team also recognized that business owners need fairly robust reporting capabilities, so they allow users to create reports by client, by project, or by specifying a preset or custom time period.




In today’s interconnected environment, we all use lots of tools, programs, and devices on a daily basis. Unfortunately, the multitude of digital applications vying for our time can be a significant time waster. IFTTT (If This, Then That) is a digital integration tool that allows your apps to work together, allowing you to do less work. The program boasts over 550 different “services” or connected applications that can be used to automate your daily tasks. Wish you could set up an automated reminder in Slack to prompt your team to submit their expense reports? IFTTT can handle it. Want your Whirlpool Smart Dryer to send you a text message when your laundry is done? IFTTT can take care of that too. With thousands of applets (or automated tasks) across hundreds of devices, your ability to improve your productivity and automate more of your workday is limited only by your creativity.

5. Canva



If this article were titled “The best programs your graphic designer wish you didn’t know about”, Canva would be at the top of the list. Canva’s drag-and-drop interface allows even the tech newbie to create professional looking documents in minutes. These aren’t your typical cookie cutter templates that look like they came from Office 2005. Canva has allowed thousands of business owners to build high quality promotional materials without hiring a professional graphic designer. The free software includes templates for everything from business cards and resumes to social media banners and infographics. While their design platform is a huge asset to your business toolkit on its own, the website also boasts a helpful learning portal that includes free classes on topics such as “Graphic Design Basics” and “Branding Your Business”.

When searching for free online productivity tools for small businesses, it’s important to consider how the tool will be used within your organization, which features are included within the free plan, and what additional costs will be incurred to get premium features if you decide to upgrade. Since each of these tools offer feature-rich services in a free package, they are a great starting point for accomplishing a variety of tasks within your business that would likely otherwise be outsourced to an expensive professional.

3 Ways to Evaluate a Capital Investment

Small business owners often find themselves in a situation where they have to evaluate a capital investment project and decide whether or not how to expand their company, purchase new equipment or move to a new location. Availability of internal funds and the ability to borrow money are often limited.  So, making the decision on whether or not to move forward with a project or purchase is critical to the health of a business.

Let’s look at an example: Suppose an owner has an extremely popular restaurant and wants to take advantage of its esteemed reputation. Should the owner expand the existing facility or open a new location on the other side of town?

Expanding the existing restaurant will cost $75,000 and is expected to produce additional annual cash flow of $25,000. A new location will require an investment of $300,000. It is projected to have an annual cash flow of $75,000 after it is up and running for a few years.

Which of these projects should the owner choose?

Fortunately, several tools are available to evaluate a capital investment that will help small business owners determine the feasibility of each project:

  • Payback method
  • Net present value of cash flows
  • Internal rate of return

Evaluate a Capital Investment with the Payback Method

The payback method is the simplest to use. It is the time needed for cash inflows to cover the initial cost of the investment. The formula is the initial investment divided by the annual cash flow.

Take the example of the choices facing the restaurant owner. The payback period for the expansion of the existing facility is three years ($75,000 divided by $25,000). Since the restaurant is already operating, the increase in cash flow will take place fairly quickly.

Alternatively,  once there is a steady customer base, the payback period for opening a new location could be four years ($300,000 divided by $75,000). However, the cash flow for the early years after opening is uncertain, so the payback period may be longer.

The payback method has the following weaknesses:

  • The payback method won’t include cash flows beyond the payback period.
  • It does not consider the risk of receiving future cash flows.
  • This method fails to take into account the time value of money.

Evaluate a Capital Investment with Net Present Value

Unlike the payback method, the net present value calculation considers the time value of money. It includes future cash flows after the payback period and for as long as the project generates cash.

NPV takes a stream of future cash flows and discounts them back to their present value at the current interest rate on loans or the rate of return required by an investor or owner.

The amount that the present value of cash inflows exceeds the present value of the initial investment is the project’s NPV. This makes it possible to compare projects to each other by determining which one has the highest NPV. This method has a bias toward larger projects. This is because larger projects can show higher a higher NPV than smaller projects which have fewer dollars invested.

You can adjust the discount rate used to calculate the NPV so that you can compensate for the risk level of future cash flows. In the restaurant example, the discount rate used to calculate the NPV for a new location will be higher because of the greater uncertainty of future cash flows. Cash flows from expansion of the existing facility is more certain.

Evaluate a Capital Investment with Internal Rate of Return

The internal rate of return for a project is the discount rate that makes the net present value of the investment equal to zero.  You should consider accepting a project if its IRR exceeds your required hurdle rate. As the business owner, you determine your hurdle rate.

When using the IRR approach, you can compare projects with each other.  Upon comparing, you should select the project with the higher IRR, assuming the IRR exceeds the required hurtle rate.

None of these methods will provide the ultimate answer by themselves. Each approach has its advantages and shortcomings. The payback method is simple to use but does not include cash flows beyond the payback period. The net present value calculations favor large projects over small ones.  In addition, the internal rate of return gives multiple answers when cash flows are both positive and negative.

The most sensible approach is to use all three methods to get comparison figures for guidance and then apply experienced judgement and common sense.

Key Financial Metrics for Small Business: The Numbers You Need to Track

Just as drivers watch the instrument panel on their cars when driving, small business owners should continuously monitor the performance metrics of their company. An owner needs to know what’s working and what’s not. That’s part of managing a business. Just like it’s part of driving a car.  A water temperature gauge that goes into the red zone needs immediate attention; same with a financial metric that indicates the company is running short of cash. Key financial metrics for small business fall into four primary categories:

  • Profits
  • Liquidity
  • Leverage
  • Efficiency

Within these four categories, there are seven core metrics that act as the most important key performance indicators when it comes to cash flow:

Key Financial Metrics for Small Business

Measures of Profits

Revenue – This may seem obvious, but without revenue, nothing else happens, especially profits. And all revenue starts with sales. So, the first metric to watch is your most recent sales number; it could be daily, weekly or monthly, depending on the type of business,

Are your sales at the level they need to be? Comparisons of sales figures to the budget will help to keep everyone on course to reaching the revenue goal.

Gross profit margin– The gross profit margin is an early measure of a company’s efficiency of operations. It shows how efficiently a company uses its raw materials and direct labor to make and sell a product or service at a price that produces a gross profit.

The gross profit margin must be enough to pay all fixed overhead expenses and make a profit. In some industries, a gross profit margin of 25 to 30 percent may be enough; others need a gross profit of 50 percent or more. A calculation of a company’s profit plan or break-even revenue level will determine the required gross profit margin for your business.

EBITDA – It’s nice to know you’re making a net profit, but the real test is EBITDA. That’s earnings before deductions for interest, taxes, depreciation and amortization. EBITDA reveals the true operational profits of a business without the effects of financing costs, taxes and non-cash accounting entries.

Monitoring EBITDA is important because it is an indicator of the cash flow from operations.

Liquidity to Support Operations

Current ratio– Your current ratio is current assets divided by current liabilities. The timing of the cash flow cycle from inventory to receivables to cash is not perfect. Inventory can be slower to sell and turn over; customers can take longer to pay their bills.

On the liabilities side, expenses and bills to suppliers have specific amounts and due dates – there’s no mystery, there. For this reason, you need more current assets than current liabilities. A good, comfortable ratio is to have $2 in current assets for every $1 in current liabilities. Having less could indicate that you may begin to have problems paying bills on time.

Tracking the trend of your current ratio can provide advance warnings of upcoming cash flow problems, especially if the ratio drops below 1.5.

Financial Leverage

Debt-to-equity ratio – Some debt is good; it increases a shareholder’s return on investment. But too much debt can be dangerous. Lenders have strict schedules for principal and interest payments, and they expect to receive them, regardless of the company’s cash flow availability.

Efficiency of Operations

Accounts receivable aging – The accounts receivable aging metric keeps track of all unpaid customer invoices and/or credit memos. While most customers will pay their invoices before due dates, sometimes clients can run into problems – whether their own cash flow issues or poor record keeping – which keep them from paying you in a timely manner. You should try to track invoices in 30 day buckets (30 days overdue, 60 days overdue, 90 days overdue, etc) so that you can use this information to prioritize collections procedures.

Inventory turnover– Inventory represents a significant investment for most businesses, so turning inventory into sales quickly is important. Turnover is the number of times a company buys, sells and replaces its inventory in a year. It is calculated by dividing annual cost of goods sold by the average inventory level. Depending on the industry, inventory turnover rates can reach up to 10 to 12 times per year.

A decrease in turnover could be a signal that some products are not selling well, and prices should be marked down to move them out.

Owners who regularly monitor these key financial metrics for small business will have a good sense of the pulse of their business, while enabling them to quickly spot potential problems and take corrective actions before they become detrimental to the health of your business.

5 Key Reasons to Forecast Your Cash Flow

Projecting your cash flow can help you plan for the future, avoid unexpected shortfalls and even qualify for a small business loan.

Many overextended small business owners are weary of cash flow analysis. “Analysis” of any kind sounds difficult, and who has the time or energy to make future projections? More importantly, why bother to forecast your cash flow?

Consider that poor cash flow is the number one reason small businesses fail. An alarming 82% of companies fail due to cash flow issues. Convinced you don’t need to worry because your business is profitable? Think again. Profitable companies fail all the time for the simple reason that they run out of cash.

Beyond keeping your doors open, forecasting your cash flow can take the guesswork out of where you’re going. Having a good idea of your direction can help you make smarter business decisions. A little planning goes a long way, and it doesn’t have to be difficult.

These days, intuitive online tools can do the hard work for you, automatically generating cash flow projections based on your past transactions and financial history. No spreadsheets required.

There are myriad benefits to forecasting your cash flow, from avoiding dips into the negative to planning for growth. Consider these five ways that cash flow projections can improve your business.

Avoid Shortfalls

Unexpected shortfalls can be crippling, and it may take months (if not longer) to recover. Negative cash flow can creep up on you if you don’t consistently track the cash coming in and going out. Fortunately, shortfalls are often avoidable with a bit of foresight.

Projecting your cash flow will help you identify — and plan for — market swings, seasonal fluctuations and other business patterns that can lead to unpredictable cash flow. Forecasting can even help you visualize cash flow trends with the help of automatically generated charts and graphs.

Optimize the Timing of Accounts Payable and Receivable

On a more granular level, many avoidable cash flow issues are often a simple matter of timing. Significant lag time between invoicing your customers, or shipping out products, and getting paid can cause unnecessary strain on your cash flow.

Cash flow projections that are based on your financial history can help you anticipate when you’ll be paid by customers. This allows you to stagger or otherwise adjust outgoing payments to your vendors accordingly. In turn, this can keep you from dipping into the red.  And keeps you out of the uncomfortable position of not being able to pay your suppliers, or worse, your employees.

Prove You Can Pay Back the Loan You Requested

 When you apply for a small business loan, lenders will scrutinize your cash flow history in an attempt to answer one primary question: Can this borrower pay back the loan they’re requesting?

Asking for a loan of any amount without showing your plan for paying it back is a good way to land in the rejection pile. This is especially true if your current cash flow won’t clearly cover all of your regular operating expenses — plus your loan payment.

If you find yourself in this situation, cash flow projections can help strengthen your case by showing the lender exactly how you plan to use their funds to get to a place where you can easily make loan payments. This type of forecasting allows you to hand over a road map that can instill a lender with the confidence they need to approve your loan.

Anticipate the Impact of Upcoming Changes

Does your business plan to purchase new equipment? Launch a new product? Cash flow projections allow you to gain a complete picture of the ripple effect that these types of changes will have on your cash flow.

When your finances are synced up with FINSYNC, cash flow projections are automatically generated based on future invoices, bills due and payroll. You can then create “what if” scenarios, such as buying new equipment. Forecasting shows you how the cost will affect your bottom line.  It can also show the potential increase of revenue generated by the new machine.

Plan for Future Growth

In the same manner, cash flow projections can help you plan for future growth and expansion. Whether you’re expanding your team with new employees and need to factor in increased payroll costs, or ramping up production to keep up with increased sales, future projections help you see exactly where you’re going — and how you’ll get there.

Forecasting is also an excellent goal-setting tool to help you plan out the financial steps your business needs to take to achieve targets. There’s power in cash flow projections and the insight they can provide your business. Fortunately, this competitive advantage comes with little effort when you leave the analysis to today’s sophisticated online tools.


Guest post by FINSYNC

Boost Productivity (and Give Your Brain a Break) with Mini Escapes

As a business owner, you often have little down time. But even if you can’t take a vacation, it’s important to relax and recharge. Even taking a short intermission can boost productivity by giving your brain a break.

While it might sound counter intuitive, taking time to relax can actually make you more efficient. The science behind taking small breaks says being calmer and happier releases dopamine which can be important for increasing your creativity according to Alice Flaherty, an associate professor of neurology and psychiatry at Harvard Medical School.

Here are a few ways to take a mini escape while managing a business.

Got a minute?

Try the 4-7-8 breathing technique. Researchers have found this method helps quickly relax the body’s central nervous system by having a longer exhale than inhale.

  1. Start by making an audible exhale of all the air in your lungs.
  2. Close your mouth and slowly inhale your breath, through your nose for a count of four seconds.
  3. Hold your breath for a count of seven seconds.
  4. Open your mouth and audibly exhale for a count of eight.
  5. Repeat the cycle several times.

Got 2 minutes?

Do calisthenics for beginners with a 2-minute workout. These simple body weight-bearing exercises are known for building lean muscles and help feel energized by clearing your bloodstream to reduce stress.

Here’s what Cari Shoemate, co-creator of Bombshell Bootcamp in Houston, recommended to the Daily Burn to get your heart rate going and rejuvenate your sluggish body if you’ve been staring at a computer for too long.

Do: 25 jumping jacks, 25 wall or desk push-ups, 25 alternating lunges, 25 squats

Here’s other tips from Karl Erickson, a retired green beret who spent nearly 20 years in Army Special Forces.

Got 5 minutes?

To mediate, start by finding a relaxed seated position on a chair or on the floor. Keep your back upright, but not too tense, with your hands resting in a comfortable position, says Diana Winston of

Listen to this 5-minute meditation by Winston to help guide you through an experience.

Got 10 minutes?

Take a walk in some green space. Being in nature can reap big rewards. It can improve your attention span and rejuvenate your body. Gazing at nature can make you more productive.

That’s according to a 2015 study by British Journal of Sports Medicine which found people can reduce brain fatigue by walking a half-mile through a park.

Got 15 minutes?

Try doing progressive muscle relaxation. Also called PMR, this deep-relaxation technique helps people with chronic pain, but it can also help with relaxing your body by reducing stress and anxiety.

The idea is to tense and relax your muscles, one muscle group at a time.

  • Start by taking some deep breaths in and out to notice how your muscles feel when they’re relaxed.
  • Then go muscle group by muscle group through the body. There are a variety of ways to do this.
  • Some people start with tightening the muscles in their forehand, scrunching their eyebrows up as high as they can, holding for 5-15 seconds, then taking longer to release between 15-30 seconds.
  • Other people like to start seated in a chair. With their right arm at a 90 degree angle, make a tight fist and hold. Focus on what that tension feels like for 10-15 seconds. Exhale and slowly release the tension in your fist for 20-30 seconds to let your arm fully relax.

The key is to take longer to relax your body than the time you spending in a tense position.

Got 30 minutes?

Consider de-cluttering your work space or have a meeting outside of your usual workspace during a 30-minute period. Maybe it’s catching up with a colleague or friend over coffee.

The Harvard Business Review says having a 30-minute meeting makes everyone more attentive and focused which can yield better results thanks to its compressed time frame.

As Peter Bregman writes, people are less likely to skip a 30 minute meeting and having such a short meeting, “Hones the skill of getting to the point quickly, focusing on the most essential elements of a situation, and taking action.”

Bregman says he uses this technique for working out, for meetings or tackling other tasks with an intensity that then lets him stretch out the unstructured time he spends with his family, meals with his friends, for writing and for sleep which makes him more productive both personally and professionally.

Got 60 minutes?

Go to the gym, run an errand, read a book (which can lower your heart rate) or enjoy a long lunch break. Just do something away from the computer screen to clear your mind and bring something to write down ideas.

As productivity coach Deb Lee told Stephanie Vozza of Fast Company, “Use the time to do a ‘brain dump,’ which can help get things off of your mind and on paper where they can be looked at more objectively. If you have a big project coming up, organize your thoughts in writing.”



It takes money to make money: Low Debt-to-income Ratio and specific loans that can help grow your small business

For small business owners there are many options for using debt to meet your small business’s specific needs.

Small business bank loans totaled nearly $600 billion in 2015, according to data from the U.S. Small Business Administration reported in U.S. News: “At the same time, lending from alternative sources such as finance companies and peer-to-peer, or P2P, marketplace lenders amounted to $593 billion.”

For some small business owners, borrowing money taking on debt can be a nerve-racking exercise. The business owner may have to put personal possessions, such as their homes, their cars, or other assets up as collateral for the loan. But being a smart business owner means that while you may take out loans and acquire debt, it is important to make sure that such loans can be paid back through your business activities.

This is where your debt-to-income ratio (DTI) comes into play. You can calculate DTI by dividing your business’s monthly total recurring debt by your gross monthly income. DTI is typically expressed as a percentage.

For example, if you want to purchase a newer, bigger property for your business, and your business generates some $100,000 per year in profits, it may be reasonable to purchase a property that costs $200,000; however, it might be problematic for you to purchase a property that costs $20,000,000.

Having a low debt-to-income (DTI) ratio is ideal.  A low DTI typically means that your business isn’t highly leveraged. It is also an indicator that your business would be able to survive in the event that your sales slumped. However, if you have a high DTI, you would be very much in trouble in the event of a recession or if your industry or business experiences a sudden major slowdown. A 43% DTI is typically the highest ratio that a person can have if they are applying for a mortgage; anything higher would be too risky for a bank to take on. For small businesses this is a good rule of thumb too.

Solutions for all businesses

There are many types of loans that your small business can take out that will allow you to keep your DTI in check so you don’t go overboard and find yourself swimming in an endless stream of debt. Here are examples of some specific types of loans that might benefit your business, depending on your business’s need:

1. Equipment Loan

If you run a construction business that requires you to purchase a bulldozer, you can likely purchase the product with an equipment loan. Typically you will have to make a 10% to 20% down payment.  And, the equipment itself could very well be your collateral. Your loan could come from a direct lender or from the equipment manufacturer itself.

2. Commercial Mortgage Loan

If you are looking to purchase, develop or even refinance property for your business, such as a warehouse or a storefront, you can take out an SBA loan, similar to a residential mortgage. As U.S. News reports, “Loans that are guaranteed by the Small Business Administration are usually 2 to 2.5 percent higher than the prime residential mortgage rate.”

3. Business Credit Loan

Similar to how credit cards work, you receive a maximum amount of money that you can borrow. A strong selling point for business credit loans is that you can use such credit for any business need. This means you may not feel limited and may be able to sprinkle money across many business verticals from leasing property to purchasing supplies.

4. Invoice Finance Loan

If cash flow is a major problem for your business because you have performed services or sent out goods that haven’t been paid for yet by your customers, you can finance this through companies that will cover your gaps in invoicing for a fee and interest.

Also remember, you can take out loans that have to be paid back in varying increments of time. If you don’t anticipate your business being profitable for a few years, you can take out a medium-to-long-term loan.  Loans with these terms may get you through your initial period of setup.  They can also help you make payments to your staff or cashflow required assets. Typically with longer term loans you repay less money per month because payments are spread over a longer period.  But, you must remember that interest compounds over time. So, in the end you will be paying more money in interest with a longer term loan.

Of course it may be beneficial to shop around to make sure you are getting the best rates. It is also important to note that with a low debt-to-income ratio it will be significantly easier for you to attract loans at interest rates that aren’t exorbitant.

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