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What Documents do I Need for a Small Business Loan

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Any small business owner seeking a business loan can tell you: there’s a lot more paperwork  than you’d guess between finding a satisfactory loan and getting your capital in-hand. While delays can happen for near-boundless reasons, it ought to be the prerogative of every small business owner to be certain those delays aren’t caused by insufficient documentation. All kinds of loans, small business or otherwise, require some amount of paperwork for consideration and eventual approval. While no two business loans are identical, before even considering a loan, small business owners ought to have these documents in good order. This list encompasses the basic requirements for one of the most frequently sought small business loans, the SBA 7(a) loan.  SBA loans have some of the most stringent and comprehensive documentation requirements, so if you’re prepared for this loan, you’ll likely be prepared for almost any loan!

 

Loan Application Form

This may sound obvious, but why not be thorough? Lenders generally require all people who own at least 20% of the applying business, guarantors, and sometimes managers to fill out some information on your application form. Each loan’s requirements are unique, of course, so be sure to check with your lender which members of your business must fill out the loan application form. The SBA’s 1919 Borrower Information Form is a good blueprint for what just about all lenders would like to know before partnering with your business.

 

Personal and Business Résumés

Résumés are important to the loan process; personal résumés reassure lenders of your character and experience while business résumés prove a history of business aptitude and success. For those applying for 7(a) loans, the SBA requires business owners to send résumés for each loan being applied for; this is a near-universal requirement when applying for loans from traditional lenders.

 

Business Plan + Overview and History

Your business plan must lay out – in exact detail – how the small business loan you are seeking will help your business. Whether you are planning to expedite growth through financing or you could simply benefit from more working capital, be certain that you are able to indicate exactly where the principal will go.

Your business overview and history should be a comprehensive retelling of your successes and shortcomings as a business owner. Take off the rose-tinted glasses and talk numbers – your job here is to convince lenders that your business has the potential to succeed and that you have the gusto to overcome unforeseen problems.

 

Loan Application History

Your loan application history often must include all loans you have applied for, not simply the loans that you have received. Include relevant contact information and reference numbers where possible.

 

Statements of Personal History and Financial Background

Unlike the earlier business overview and history statements, this requirement is much more straightforward. The statement of personal history (SBA Form 912) is a generally quite short form asking for basic information like your address and date of birth. SBA Form 912 also asks if you, the business owner, are under indictment, have been arrested recently, or have been convicted of a crime. While loans not guaranteed by the SBA won’t require the 912 form exactly, the form is a good template for questions most lenders are likely to ask.

Your personal financial statement (SBA Form 413) asks you to lay out your assets, collateral, sources of income, stocks and bonds, real estate, as well as nearly any financial liabilities you may have. This type of information usually factors into determining your repayment ability and creditworthiness, so it pays to be comprehensive.

 

Current Business Financial Statements

Organize and compile the following financial documents alongside your loan application:

  • Profit and Loss Statements from at least the last three years & Interim Profit and Loss Statements
  • Year-End Balance Sheet from at least the last three years & Interim Balance Sheets
  • Reconciliation of Net Worth to current day
  • Projected Financial Statement for at least the next 12 months

 

Business Income Tax Returns

In addition to your other financial documents, be certain that you have signed personal and business income tax returns for, at the very least, the past three years.

 

Business Lease

Have a copy of the current lease for your business. If you do not have an existing lease but plan to pursue one following your loan, organize with your landlord for them to provide a certification of a proposed lease.

If you plan to use the principal from your small business loan to purchase another business, there are more articles you will require:

  • Interim Profit and Loss Statements from the business you plan to purchase
  • Proposed bill of sale + list of assets from the business you plan to purchase
  • At least the two previous years of income tax returns from the business you plan to purchase

 

Business Certificate or License

Organizations like the SBA flatly require that your small business have a certificate or be fully licensed as a for-profit business to be considered for a loan. There are several benefits to seeking certification, but squarely among them is consideration for 7(a) loans. Alternative lenders will likely think highly, as well, of those businesses that have certificates and proper licenses.

 

The State of Small Business Loans and the Importance of Being Earnestly Organized

The meter-high stack of documents lenders expect from you aren’t for nothing. The information you provide on yourself and your business are meant to assess how likely it is that you will pay back lenders in a timely fashion. Seismic shifts in the business world are nothing new in the era of COVID-19. But an unexpected side effect of current trends is that lenders offering SBA secured business loans – or loans simply aimed at small business owners – are often looking for businesses with proven track records of timeliness and funding success. It looks even better for your small business when your loan application is well organized.

Keeping your financial and personal documents in an orderly, easy to access manner has benefits far beyond loan preparedness, but those small businesses who are earnestly on top of their current documents digitally and in print are often the most likely to make a positive impression on lenders which can never hurt.

heavy equipment financing

Heavy Equipment Financing 101: Definition, Pros and Cons, Requirements

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Technology is ever-changing and the equipment you’re using can quickly become obsolete. When this happens, your business may have to invest in new heavy equipment to keep itself going and remain competitive. However, large equipment purchases can put a dent in your cash flow, which could impact your operations.

Heavy equipment financing gives you the resources you need to purchase or lease much-needed heavy equipment without dipping into your cash reserves. But what exactly is heavy equipment financing? In this article, we’ll discuss its definition, the pros and cons of utilizing it, and the requirements for approval.

What Is Heavy Equipment Financing?

Heavy equipment financing is a business loan designed specifically for purchasing heavy-duty mowers, backhoes, bulldozers, and other heavy equipment. The loan is prevalent in manufacturing, agriculture, transportation, and even the food industry.

Lenders give you the working capital needed to secure the necessary equipment. You can get up to 100% financing to cover the cost of the equipment depending on several factors, like your credit rating, type of equipment, and the industry you’re in.

Pros of Heavy Equipment Financing

Securing financing for your new heavy equipment provides you with several benefits you won’t enjoy from other options.
One is that a business owner has the potential to claim a full deduction on the amount of the purchase from yearly income tax. Under Section 179 of the Internal Revenue Code, businesses that purchase new machinery this year may be able to claim tax deductions of up to $1.05 million. One of the key requirements, however, is that the equipment must be used in business operations in the tax year for which you’re claiming deductions in order to take advantage of this deduction.

Leasing offers a similar benefit, but you can only deduct the amount you’re paying every month from the lease. The deduction would be equal to the monthly amortization multiplied by 12 months. Leasing does guarantee yearly tax savings throughout the contract, but heavy equipment financing offers a higher lump-sum compensation immediately after purchasing the gear, aside from the annual deductions from the fees and interest incurred.

Another benefit of heavy equipment financing is flexibility. Armed with your financial statements, you have the opportunity to negotiate more comfortable terms. This means you can avoid breaking the bank and maintain good financial standing. You can also exert a degree of control over your cash flow and expenditures.

In all cases, financing is a method that helps businesses like yours build good credit records. You just need to make sure your lender reports your standing to business credit bureaus. It could be a pathway through which you get access to more business credit.

Cons of Heavy Equipment Financing

Like all available options for acquiring heavy equipment, financing also has its own set of disadvantages.
One disadvantage is that the significant amount of the loan and the extended terms can tie your finances down until it matures. It might be difficult for you to secure another loan when you need it, as some lenders are wary about granting loans when borrowers appear to be deep in debt already. This is beyond your control since lenders base decisions on your financial statements.

In addition, the ongoing loan could affect your financial health. Loan payments are accounted for as liabilities, so there’s a risk of your debt-to-asset ratio getting higher. In the eyes of creditors, a high ratio means that a borrower carries a high risk of not paying back a loan. As stated above, they may decline your application or, at the very least, attach high-interest rates to the money they will lend.

While this doesn’t happen often, another drawback is that the lender might require you to secure the loan using existing assets. Some creditors do not require any collateral, preferring instead to secure the loan with the equipment being purchased.

Unless expressly stated during the application process and in your contract, you can rest assured that your business and personal assets are safe even if you default on your obligation in heavy equipment financing.
Last but not least, an overly long repayment period could result in depreciation. In other words, your heavy equipment might become obsolete after it is fully paid off. Of course, this can be avoided by negotiating shorter yet still affordable repayment terms.

How to Apply for a Heavy Equipment Financing

The application process for heavy equipment financing is fast and straightforward. Many lenders, like Kapitus, offer an easy-to-use equipment financing application that should only take about five minutes to complete and requires minimal documentation.

One of the documents required is the vendor invoice. The invoice proves the value of the heavy equipment you’re looking to borrow money for. The lender needs this to know how much you need from them. Your vendor will send this invoice to you as part of your purchase agreement. You don’t have to pay for the invoice right away, which gives you more time to seek financing.

You also need to prepare your financial statements, which include documentation from your bank. It’s highly recommended to have at least six months’ worth of statements on hand when you are applying.
Once you’ve gathered all your documents, you just need to go to the issuer’s website and complete an application. The application covers information about your business, the type of equipment you’re looking to purchase, and some personal information.

Complete the application, attach the needed documents, and you’ve applied!. Make sure to free up some time because a consultant will call you to learn more about your business. After receiving confirmation of approval, you’ll also receive another call to discuss your payment terms just before the lender pays for the vendor invoice.
The payment and final delivery of the equipment then conclude the process. As mentioned earlier, all that’s left to do is to keep your end of the bargain by making payments as agreed upon.

Maximizing the Benefits of Heavy Equipment Financing

As a bonus, here are some tips that could help you maximize the benefits of a heavy equipment loan.
Many businesses choose to purchase new equipment as it’s less likely to break down from frequent use and is covered by warranty for the first few years. In other words, you can avoid expensive maintenance or repair fees that could affect your cash flow.

If you find yourself preferring used equipment, you should enlist a professional mechanic to inspect the equipment before you request an invoice. If there are defects, secure the seller’s commitment to fixing them before moving forward with a purchase. Again, the goal is to avoid spending money on repair and maintenance as much as possible.
Lastly, don’t be afraid to negotiate. There’s a reason why there are a couple of calls before you’re approved for your heavy equipment loan. This gives you time to understand your contract’s terms and allows you to discuss and negotiate those terms.

Your equipment is an integral and essential part of your business. You should not hesitate to invest in new equipment if the old ones in your inventory are way past their useful lives. Many creditors are ready to help you with this significant investment through heavy equipment financing.

The Benefits of Business Lines of Credit 

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For small business owners that have ongoing business expenses and uneven cash flows, a business line of credit may be the most convenient and useful financing method in your toolbox. 

Too often, however, small business owners confuse a business line of credit and a business credit card and end up paying a higher interest rate on revolving debt as a result.

What is a Business Line of Credit?

A business line of credit is typically an unsecured line of credit that can be granted to a small business by either a bank or an alternative lender. The line of credit has a predetermined limit set by the lender (and it’s typically higher than a business credit card) based on the risk you present as a borrower, and like a business credit card, can be used to address any expense that arises for your business. 

Unlike other types of typical small business loans, with a business line of credit, there is no lump-sum disbursement of funds that requires a subsequent monthly payment, and you don’t have to specify to the lender exactly what you intend to use the funds for. 

Also, similar to a credit card, your debt will be revolving, and interest will be accrued only on the amount that you have borrowed. The line of credit typically is subject to a periodic review and renewal, often annually..

Business Line of Credit vs. Business Credit Card 

While both a business line of credit and a business credit card are forms of revolving debt that are typically used for short-term funding needs, the main differences between them are the interest rate and what they generally are used for. 

A business credit card can charge more than 20% APR for purchases, and an even higher rate for cash advances. The rate for a business line of credit usually ranges between 10% to 15%, and the rate will still be the same when you use the line of credit for cash. 

What are Each Used for?

A business line of credit and a credit card may also be used for different reasons. Lines of credit are sometimes used by seasonal small businesses that need funds to cover operating expenses during slow periods of the year, such as payroll; or when it has an unexpected expense. Small businesses can also use their lines of credit to gain access to funds without having the hassle or expense of applying for a loan, and the repayment terms are often more flexible than with business credit cards. 

On the other hand, a small business credit card will come in handy for smaller purchases that you typically wouldn’t use your line of credit for, such as when you have to pick up the tab for a business meal or need to buy a new inkjet printer for the office and don’t wish to make a trip to the bank to withdraw the funds. A credit card also often offers perks such as cash back offers or travel miles that a line of credit would not.

Once again, be warned that business credit cards typically offer a lower credit limit than a business line of credit and are more expensive.

What is a Secured vs. Unsecured Line of Credit?

An unsecured line of credit is not guaranteed by collateral. Typically, it will carry a higher interest rate than a secured line of credit because the lender is taking on greater risk than with a secured line of credit. It is usually granted to businesses that have been in operation for several years and have consistently strong annual revenues. 

With a secured line of credit, you will usually be granted a larger spending limit because it is guaranteed by physical assets, which lenders prefer. Some banks, however, may ask that your personal assets be used to secure your line of credit, while alternative lenders typically just ask for your business assets. A lender may also require that you secure your line of credit if you require a limit of more than $100,000.

How Do You Qualify for a Line of Credit?

Business lines of credit are generally more difficult to obtain than business credit cards. Typically, small business owners that have a FICO score of at least 650 and have been in business for at least two years with annual revenue of at least $180,000 will qualify for a business line of credit, but those terms will vary depending on which lender you are doing business with. Alternative lenders often will have less stringent requirements.

Small businesses that don’t qualify for a business line of credit because they don’t have a long history in business or a profit margin that’s too low may find a business credit card to be useful, and there are plenty of them out there that offer perks and cashback rewards. 

In general, however, a business line of credit can be a great reward for small business owners that have worked hard to establish their businesses over time.

Stacks of golden coins coins with a red financial graph behind.

What is Revenue-Based Financing and How Can it Benefit You?

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Let’s say you have an idea for a brilliant new product, but you just don’t have the money to research, develop and market it, and you’ve been turned down by traditional lenders and the private equity markets for capital. What if your small business needs cash to cover a business emergency, but your bank’s lending process just takes too long? 

What do you do? 

The answer could lie in one of the fastest-rising – yet least known – funding solutions out there: revenue-based financing (RBF). RBF is a form of financing that could get you the assets you need quickly and without the need for personal collateral or an impeccable credit score.

What is Revenue-Based Financing?

RBF is a capital-raising method in which a lender, such as Kapitus, agrees to provide money to a business in exchange for a predetermined percentage of a company’s future gross revenues, plus a pre-agreed upon multiple of the original amount, over a predetermined time frame.

In essence, it allows a company to successfully raise money without giving away any ownership stake and without the business owner having to pledge personal assets, such as his or her home, as collateral. Furthermore, relative to debt and equity financing, revenue-based financing is a much easier process that requires less documentation when applying. 

In short, RBF is one of a few types of business financing methods that limits the personal exposure of the business owner and looks to the business itself when making underwriting decisions. 

In deciding who qualifies for RBF, lenders primarily look at a company’s sales history. In some cases, all you will need to submit is three months of business bank statements. Therefore, the underwriting process is relatively fast, and approval can come in mere hours. Once approved, many lenders can have funds in your bank within 24 hours.

Who Should Use RBF?

RBF can be used by virtually any small business with a strong sales history. If you own a plumbing or retail business and you need $20,000 because the roof starts leaking or your air conditioning machines break down, RBF may be your solution since you can get cash in your hands quickly with little paperwork relative to a business loan or other forms of financing. 

RBF can also be an ideal solution for larger small businesses, such as consumer software firms that have a strong sales history, which can borrow larger amounts to fund the research, development and marketing of a new product. According to a 2020 report issued by BootStrapp, the most popular users of RBF were software-as-a-service (Saas) companies, followed by food and beverage companies, consumer products companies, eCommerce and healthcare businesses.

How Does RBF Work?

Let’s say you own a larger business, such as a software-as-a-service (SaaS) company, and you believe that the future growth of your business can only be ensured by introducing a new software product that requires an additional $250,000 in capital to research, develop and market. However, you are not able to obtain a loan from traditional lenders because of your credit score, and the initial stakeholders in your company do not want to add any additional investors. 

Your company can arrange a deal with an RBF provider to get $250,000 in exchange for a portion of your company’s future revenues. Your company will be required to make agreed-upon installment payments equal to a percentage of your overall revenue plus a small multiple of the original amount to compensate for the risk.

What are the Advantages of RBF?

In revenue-based financing, investors are entitled to regular repayments of their initially invested capital, so it is like a loan in that regard. However, it differs from a loan in that interest is not charged. Instead, there is a fixed cost of capital, meaning that the repayments are calculated using a predetermined multiple that results in returns that are higher than the initial investment and that cost does not change as long as the terms of the agreement are met. 

Also, RBF offers unique advantages over receiving investments from venture capital or angel investors. With private equity, investors often require collateral, an ownership stake in your company and/or seats on your company’s board of directors, if you have such a board. RBF could also be an attractive financing model if your small business has no intention of going public any time soon – as most small businesses do not – as private equity investors often look for a big exit strategy such as an IPO. 

Who Needs Revenue-Based Financing? 

Really, any business large or small with strong, predictable monthly sales can qualify for RBF, if it is appropriate. In general, companies that have strong sales and are seeking to expand with a new product offering or need money for an emergency or may look to RBF as an alternative to traditional lending. 

What Are the Risks of RBF?

As a business, the biggest risk of RBF is that your sales go south, making the repayment of the loan longer. That said, investors take on much of the risk because the repayment of the investment is in direct proportion to the company’s revenues. For the company receiving the financing, if sales unexpectedly drop, the repayment of the investment will take longer, and the investor will still expect to receive the same multiple on the principal investment amount. 

Generally however, the lender and the borrower both benefit in an RBF deal because they both want the company to be successful and for repayment of the investment to be quick. The structure of the RBF deal prevents either party from getting completely burned, unless the borrowing company goes under and is forced to declare bankruptcy.

Finally, it is important to note that RBF is not for every company. The model works only with companies that historically generate strong revenues, be it a healthcare, consumer software or business services company. A company that wants to use revenue-based financing must also have strong gross sales margins to ensure their ability to repay the investment.

LLC operation agreement

Why You Want to be an LLC and How to Create One

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If you are the sole proprietor of your small business, and – heaven forbid – your business gets sued or must file for bankruptcy, are your personal assets, such as your house or your car, at risk? If this question keeps you up at night, now may be the time to consider converting your business into a limited liability company (LLC). 

An LLC literally does what its name implies – limits your personal liability in the event that creditors or the IRS comes after your company, plus it simplifies taxes. It is a relatively new type of business entity that provides the legal protections of a corporation with fewer tax and financial hurdles. You can form an LLC for nearly any business. 

What is an LLC?

An LLC gives your business its own legal identity. It is a legal status granted to a business that relieves owners of personal responsibility for the company’s debts and liabilities and establishes the business as an official legal entity. In a sole proprietorship, you must file your business’ net income or losses on your personal balance sheet. This makes you personally liable if your company is sued or must file for bankruptcy. In such a case, creditors or the government can – and most likely will – come after your personal assets such as your home, car and personal bank accounts. 

Take note, however, that you can still be sued personally with an LLC, depending on the circumstances. For example, if you’re a masseuse and you accidentally hurt a customer’s back, that customer can still sue you personally. You should still consider taking out a business insurance policy for this reason. 

Unlike a sole proprietorship, you and your business would be separate under a LLC. Once you’ve established your business as a LLC, you can open a checking and savings account in the name of your business. Also, LLCs can be taxed as either a sole proprietorship or as an LLC, and can take on business partners or be a single member LLC.

What are the Benefits of an LLC?

There are distinct advantages and disadvantages to converting to a LLC as opposed to a sole proprietorship. The first advantage is that single member LLCs are typically taxed as sole proprietorships, and the tax liability passes through to the owner’s personal tax return (hence the term, “pass-through” business). 

Second, since a single member LLC is treated as a pass-through business, that means that the single member can still qualify for the 20% qualified business income tax deduction, created by the 2018 Tax Cuts and Jobs Act, and yet, as previously mentioned, enjoy limited personal liability from lawsuits filed against the business and bankruptcy. You can choose to be taxed either once or twice (both as a corporation and a sole proprietor) – whichever option minimizes taxes. 

While an LLC itself doesn’t pay taxes, co-owned LLCs (LLCs that have more than one owner) must file the U.S. Return of Partnership Income  Form 1065 with the IRS each year. Each partner in the LLC must file this form separately, which the IRS reviews to make sure each LLC partner correctly reports their income. Single members must fill out form 1040 Schedule C with the IRS that will report your operating results, including profits or losses. You also have the flexibility to be taxed as a corporation, which, in some cases, can mean even more tax savings. You should speak with your accountant to determine which is best for tax reasons. 

Third is that you don’t have to deal with the red tape and bureaucracy of an S or a C corporation. For example, in an LLC, you don’t have to form a board of directors or have attorneys make sure you are in compliance with federal securities regulations and keep track of board meetings. 

Potential Drawbacks

The biggest drawbacks of an LLC is that you cannot sell shares of your company or go public – the company is solely owned by you and/or your members. You also will not be recognized globally, which means that if you operate or gain sales in another country, you may be taxed as a corporation. 

Other potential disadvantages are that LLCs differ from corporations in that they do not have specific roles, such as directors, managers, etc., which could lead to confusion as to who among the members is in charge. Additionally, in some states, LLCs may legally cease to exist if a member drops out. 

Forming an LLC

There are distinctive steps to forming or converting your existing business into an LLC, but the first thing you may want to do before doing so is to hire an attorney that is familiar with the laws in your state, because each state has different rules and fees when it comes to creating an LLC. Regardless of the state you are in, the basic process is:

Choose a Name for Your LLC

This sounds very straightforward, but the advantage of choosing a name for your LLC is that it will be unique to your business, as no other business will be able to use your name. Most states require your business’ name to end in LLC, and in most states you can reserve your name for 6-12 months for a small fee. Some states, such as New York, will not allow you to use certain words in your LLC’s name, such as “bank,” “Academy” or “Assurance.”

File Articles of Organization

Articles of organization is a document that outlines the initial statements required to form an LLC. Some states, such as New Hampshire and New Jersey, call them “Certificate of Formation.” While creating such a document sounds complicated, most states do make it easy – a form is available on the websites of most states’ Secretary of State that is typically simple to fill out. These forms will require you to name the members of your LLC, the physical address of your company and how it will be managed. All states charge a small fee, usually around $100, to file this document. 

Choose a Registered Agent

Every state requires an LLC to have a registered agent – an individual or company that agrees to accept legal papers on behalf of the LLC in the event that it is sued. The registered agent must have a physical address in the state in which the LLC is registered, and most states, such as California, provide a list of commercial registered agents that will act as an agent for an annual fee. In most states, an LLC member can also act as a the registered agent. You may want to hire an attorney to advise in choosing an agent.

Create an LLC Operating Agreement

Some states – but not most – require that you file an operating agreement. This is an internal document establishing how your LLC will be managed. While most states do not require one, you should create one in the event that one of the LLC’s members takes legal action against the LLC. You should work with an attorney when creating an operating agreement. Additionally, if you do not have an operating agreement, your state may dictate how your LLC operates. 

Comply with Your States’ Tax and Regulatory Requirements

This will require several steps that you should do in consultation with your attorney and/or accountant. 

  • First, you must create an Employer Identification Number (EIN) with the IRS if your LLC has more than one member. If the only managing member is you, you can elect to have your business taxed as a corporation rather than a sole proprietorship. As previously mentioned, your business will be able to keep its pass-through status in the event that you do. 
  • Second, you will need a business license depending on what type of business you are running. Depending on the specific rules of your local and state governments, you may even need to obtain additional licenses in order to do business in your local community. 
  • Third, your LLC must register with the appropriate state taxing authority in order to collect sales taxes and withhold state and local taxes from your employees’ paychecks. 

Get Ready to File Annual Reports

Some states will require your LLC to file an annual report every year – a document stating the yearly, detailed financial results of your business. While the task may sound daunting, you should work with your accountant or attorney on creating one.

While creating an LLC may be an arduous process, it will go a long way in legitimizing your business and cutting down on legal liability. Your business will have its own identity and be more organized for future growth.

The Key Details of the Working Capital Cycle

What is a Working Capital Cycle

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In the sometimes-lengthy process of turning a product into capital, all businesses are subject to what is called the “working capital cycle” (WCC). The working capital cycle is the amount of time it takes for a business to pay off their liabilities, such as their suppliers, and then begin collecting all cash they receive from sales as profit within one operating cycle. A well-managed working capital cycle often reflects a well-managed business. Businesses with working capital cycles with too many operational stopgaps can lead to low liquidity and a less stable production line. Effectively managing your company’s working capital cycle can give massive insight into your own operations and can better inform your financial decision-making.

Elements of a Working Capital Cycle

A working capital cycle can be separated into three categories, often called Accounts Payable Days, Inventory Days, and Accounts Receivable Days:

Accounts Payable Days: A business purchases raw materials for manufacturing and has a certain number of days to pay suppliers. The number of days in which you must pay your suppliers are your “Accounts Payable Days.”

Inventory Days: A business sells that inventory made from those raw materials to customers over a certain number of days. However many days it takes to sell your inventory are your “Inventory Days.”

Accounts Receivable Days: A business receives payment from customers over a certain number of days via invoice or credit card. The number of days you must wait for invoices and credit charges to become capital are your “Accounts Receivable Days.”

The basis of a good working capital cycle is making sure accounts receivable and inventory days are few enough so you can still pay suppliers on time. A working capital cycle can also be written as the formula:

Inventory Days + Receivable Days – Payable Days = Working Capital Cycle

Positive Working Capital Cycle

In most working capital cycles there are more accounts payable days — the days where payments from clients come in — than inventory and receivable days. This can be due to invoices or credit card processing windows that can take up to several weeks to become capital. Working capital cycles where payable days outnumber the sum of inventory days and receivable days are called positive working capital cycles. 

Positive Working Capital Cycle Example: A CD manufacturing company takes 80 days to sell their available inventory during an operations cycle and then takes 45 days for credit card payments and invoices to become capital. The company also has 45 days to pay their suppliers for the raw materials, so their working capital cycle takes 80 days and is positive.

80 Inventory Days + 45 Accounts Receivable Days – 45 Accounts Payable Days = 80-Day Working Capital Cycle

Negative Working Capital Cycle

Despite its name, negative working capital cycles are often anything but a negative impact on a business’s operations. If your business has no gap between when inventory is sold in exchange for hard capital, they very likely would run a negative working capital cycle. The most traditional example of negative working capital cycle businesses are those that only accept cash. A business that deals solely in cash and has no invoices would have a zero Accounts Receivable Days meaning it is possible Accounts Payable Days may be greater than Inventory Days, leading to a negative working capital cycle.

Negative Working Capital Cycle Example: A local farmers market takes 30 days to sell all of their available inventory during one operations cycle. The farmers market only accepts cash and has no invoices. Since the farmers market has all capital on-hand at the point of sale, they have 0 Accounts Receivable Days. The farmers market takes 45 days to pay for raw materials and liabilities, meaning their working capital cycle takes -15 days.

30 Inventory Days + 0 Accounts Receivable Days – 45 Accounts Payable Days = -15-Day Working Capital Cycle

Improving Working Capital with Tactical Financing

One of the most frustrating parts of business operations is waiting for invoices to cash after making a sale. The 30, 60 or even 120 days necessary for invoices to become capital will take a massive toll on a company’s working capital cycle. That number of days is a business’s “Accounts Receivable Days” and by shortening the amount of time an invoice is in limbo, a business can massively improve their working capital cycle.

Invoice factoring is an agreement between a business and lender where the business sells unpaid invoices to a lender who then pays approximately 95% of the invoice’s value up front. In most invoice factoring agreements, it is then up to the lender to collect on the original invoice. When the client’s invoice eventually clears, the lender, or factor, will send a final percentage of the invoice to the business while usually keeping a 3% fee for the transaction.

By expediting the time an invoice takes to become capital, a business can massively increase their cash flow and in turn improve their working capital cycle. There are, however, counterexamples where an invoice factoring agreement may extend a working capital cycle. If an invoice factoring agreement allows for business recourse, then the business, not the lender, is responsible for invoices that go unpaid. This can also be the case if a factoring company is unable to collect, or has a difficult time collecting on an invoice.  In these cases, it could be a while until you get that last percent from your invoices. If you would like to learn more about invoice factoring and other working capital loan options, please see Kapitus’s comprehensive guide detailing the several working capital loans options for small businesses.

Shortening Your Working Capital Cycle

Without becoming a solely cash business there are several strategies to shortening a working capital cycle to increase cash flow.

Reevaluate Manufacturer Options: When was the last time your business checked your supplier’s competition? Depending on your business and operation cycles there are likely several optimizations to your business which could effectively reduce Inventory Days. Is it possible to buy your most frequently used materials in bulk? Have you considered working with emerging manufacturing hotspots like Malaysia or Indonesia? Sit down with your team and think creatively about how your business can take advantage of rising globalism and manufacturing options to keep inventory turnover and quality high. Keep an eye out for local manufacturing options alternatives as well.

Renegotiate Existing Deals: Most modern operation cycles require several cultivated relationships with manufacturers and liveries which should be regularly assessed to make sure your business is getting the best deal possible. When your business buys raw materials from a supplier, how long is your credit period? That credit period is the same as your business’s Accounts Payable Days and by expanding the number of days your business must pay back suppliers in, your working capital cycle will shorten as well.

Kick Up Accounts Receivables Collection: There are several other ways to speed up accounts receivables collection without invoice factoring or financing. By shortening the amount of time between a sale and when that sale becomes liquid your business’s cash flow and working capital cycle will both improve. Consider making an updated A/R Aging Report which consolidates all of company’s accounts receivables data into one place for easy consideration and optimization. Does your business offer payment plans for high-volume purchases? A great way to attract new clients and boost monthly receivables is to offer structured payment plans. Another strategy to maximize your business’s accounts receivables is to increase your client base.

Final Considerations and the Nature of the Working Capital Cycle

Barring very specific industries, having a positive working capital cycle is a good indicator that a business is financially sound. Regarding growth, however, it is often difficult for companies to expand when their operational cycles leave low liquidity and high asset value. This is why several businesses seek financing from banks or private lenders to cover working capital and in turn reinvest in their own operations.

There is no universally ‘good’ working capital cycle because every business’s operations cycle is different. If your business has several long-term invoices, invoice financing could be a great way to kick up your working capital cycle. If your slowdown is on the manufacturer’s side however, you will need to consider wholly different solutions.

If you would like to learn more about your business’s working capital cycle financing options, please get in touch with a Kapitus financing expert who can address your unique situation.

Bubbles with business related images inside floating above a bird view of the city.

Tips on Starting, Funding a New Business

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Small businesses are being created now more than ever, thanks to people being laid off or furloughed during the COVID-19 pandemic and the advent of online tools aimed at helping budding entrepreneurs. In April 2021, roughly 500,000 people in the U.S. applied for new business applications, compared to just 300,000 in the same month of 2020, according to the Bureau of Labor Statistics.

While the current climate may make the decision to start your own business easier than ever before, it certainly doesn’t mean that starting a new business is easy. While creating your small business from scratch does start with a dream, a great idea and some funding, you’ll probably also need online training, business acumen and an understanding of some basic financial and marketing principles to get going. 

Mapping Out Your Business

Whether you are launching a construction business, retail store, business services firm or an eCommerce site, before you even think about funding, you’ll need to produce a business plan. 

A business plan is a specific outline of your business, what it will entail and how it will make money. If you plan to seek initial investors for your business, be it angel or venture cap investors or through crowdsourcing, you’re going to need one. 

Source: Growthink

There are cost-effective online tools out there that can provide you with a template for a presentable business plan, such as this one from Growthink, that can make it easy for you – all you have to do is plug in the text and the program will do the rest for you. The basic ingredients of a plan for a new business are:

  • Executive Summary

The executive summary should clearly tell the reader what you want to accomplish as a business, and why your business is special. This is often referred to as a mission statement and is extremely important to potential investors. All too often, this is buried in the middle of the business plan but needs to be stated upfront.

  • Business Description 

The business description should include a clear description of your industry, as well as the products or services you are seeking to sell within it. This is your chance to describe why your product or service stands out in the industry and why you think customers will choose it over your competitors. 

  • Marketing Strategy

This part of the business plan requires a meticulous analysis of the market you are trying to sell your product in, and who you want to sell your product or services to. As an entrepreneur, you need to be familiar with all aspects of the market you’re looking to sell in, as well as carefully define your target market so that your company can be positioned to garner its share of sales.

  • Competitive Analysis

Present a description of what your competitors offer, what their strengths and weaknesses are, and how big the market is in which you are trying to sell. Then, clearly explain what gives your business a competitive advantage. Put simply, why do you think consumers will choose your products or services over your competitors? 

  • Design and Development Plan

The purpose of a design and development plan is to provide a description of the design of your products or services, chart their development within the context of production, marketing and the company itself, and create a development budget that will enable your company to reach its goals.

  • Operations and Management Plan

This plan describes how your business will function on a continuing basis. Who, if anyone, is going to be in charge besides yourself? Where will your business function and what kind of equipment and inventory will you need? Who will you need to hire and for what functions? 

Put simply, the plan will clearly explain the various responsibilities of your management team (if you plan to have one), the tasks assigned to each person in your company, as well as the capital and expense requirements related to the operations of the business. 

If the only employee will be you, you need to clearly spell out what kind of compensation you will need for yourself, as well as the equipment, supplies and space you will need to make your business operate smoothly. 

Business Basics

In planning out a new business, you need to learn basic business terms and why they’re important. There are online courses (and many of them are free!) to teach you the basics of managing a business, such as what sales and profit margins are, customer retention and conversion, etc. 

In order to successfully launch your business, here are some basic business terms you should familiarize yourself with right off the bat:

  • Sales Margin 

Also known as contribution margin, this metric basically determines what you should be charging for your products or services in order to be profitable. It is the amount of money you charge for your product minus the cost associated with producing your product or service. Those costs include manufacturing costs, advertising/marketing and salaries. 

  • Customer Acquisition Cost

This metric helps determine what each sale costs. Simply add up the cost of marketing and sales — including salaries and overhead — and divide by the number of customers you land during a specific time frame.

  • Customer Retention Rate

Customer retention rate is a key metric that essentially tells you if your customers are happy, and will help you determine how quickly you can grow your business. It measures what percentage of your customers have kept coming back over a period of time, and can be calculated over a weekly, monthly or annual basis, depending on your preference.

  • Customer Conversion Rate

This metric basically tells you whether your marketing and sales efforts are paying off. It is simply the percentage of people who walk into your business or visit your website who end up becoming customers. If the conversion rate is low, you may want to change the way you are marketing or advertising your business. You may want to offer more discounts on your website if your conversion rate is low, for example. 

  • Revenue Percentages

If your small business is like most, you probably have more than one source of revenue. Where your revenue is coming from will tell you about shifting trends in your market and what consumers are spending money on. 

For example, if you run a small contracting business, you may get revenue from customers who want to build new homes and revenue from customers who want to renovate their homes. If you notice that, suddenly, many more customers are interested in home renovation rather than new home building, you may want to change your marketing efforts accordingly. 

Build a Website

Whether you’re a doctor or a plumber, it is virtually impossible today to run your business without having an online presence. When consumers search for your services, the first place they will search is the internet. 

Having an online presence means that potential customers can easily find you via a web search, know what products or services you offer, and what makes you unique. You can even set up your website to make direct sales.

Building your own website does not have to be costly, as there are plenty of do-it-yourself website builders such as Wix and SQUARESPACE that can make it easy. In a previous article, Kapitus offered a step-by-step guide to building your own site.

Potential Funding Sources

When you’re looking to start a business, traditional and alternative small business lending sources are probably not an option, since most require years in business. There are funding sources available to you, however, if your personal savings and help from friends and family members are not enough to start your own business:

  • Angel Investors

This option is pretty much what the hit show “Shark Tank” is about. Angel investors are individuals who are willing to invest in start-ups or early stage companies, typically between $25,000 to $100,000, in exchange for a piece of ownership. Their hope is that their investments will pay off big when your company either goes public or when your company becomes big enough so that you can comfortably buy out their pieces of ownership for a hefty sum more than the amount that they originally invested. 

Source: Angel List

Angel investors are often successful entrepreneurs themselves and can offer mentorship and business advice, and typically want to see a strong business plan as well as your plans for growth before they invest. You can find angel investors from other entrepreneurs, or search online through sites such as Angel List.

  • Crowdfunding 

Crowdfunding is becoming one of the most popular ways to garner funds for startup businesses. It is the practice of raising funds through popular crowdfunding websites. 

Setting up a crowdfunding campaign is relatively easy. In most cases, all it takes is setting up a profile on a crowdfunding site, describing your company and its business, and the amount of money you are seeking to raise. In order to attract investors, your business plan and products must seem compelling and differentiating. 

One of the best features of a typical crowdfunding plan is that you usually don’t have to give up pieces of ownership in your business, as people who are interested in investing typically do so in exchange for some kind of reward from your business, such as a discount based on the amount donated, or some form of profit sharing in your business.

Equity crowdfunding, however, is when you are selling stock or some other interest in your company in exchange for cash, and requires compliance with federal and state securities laws. In this form of crowdfunding, you should consult with an investment attorney.

Crowdfunding sites usually charge a fee to list your campaign, which will either be a processing fee or a percentage of the funds raised. Some of the most popular sites include Kickstarter, Indiegogo, Crowd Supply, Crowdfunder and SeedInvest.

  • Grants

There are several private grants available through application for startup and small businesses that could reward you with $10,000 to $150,000 in startup cash, especially if you are launching a woman- or minority-owned business.  Additionally, there are some grants offered through the U.S. Small Business Administration. Some of these grants usually require a business to be community-related or involve mentorship of some kind, so be sure to carefully examine the requirements before applying. 

  • Small Business Credit Cards

Since traditional and alternative business loans are not typically available for startup businesses, you may want to apply for a business credit card. These types of cards often require a strong personal credit score – not years in business – so they may be a good alternative funding source. Like with any credit card, interest is only charged on the amount borrowed, and these cards often come with perks such as cash back rewards, airline mileage points and discounts with selected retailers. 

In the past year, a number of credit card issuers have offered cards that specifically focus on the small business market and do not require personal guarantees, which means use of the card will not impact your personal credit score. One example is Brex, which offers a small business card for early-stage technology companies with professional funding. The credit limits may be substantially higher than traditional credit cards, and they often provide valuable rewards.

  • Venture Capital

Of course, VC funding is usually thought of first as a funding source for startup companies, but they often have the most stringent requirements. VC managers typically want to see strong business plans, and often require seats on company boards, right of first refusal, anti-dilution protection and high ownership stakes. It is often difficult to obtain VC funding as most fund managers are inundated with funding requests and often only accept pitches through referrals from trusted sources, such as other successful startups and successful entrepreneurs. 

Several rounds of funding are often involved, and most VC fund managers are seeking highly profitable exit strategies, such as an IPO or an acquisition, even though most startup businesses do not have any such plans on their horizons. If your startup business does have grand plans of becoming the next Amazon or Microsoft, then VC funding may be for you. 

Starting your own business may be a complex, exhausting task that will require hard work and long hours, but in the end, the thought of being your own boss, setting your own hours and not having limits on your compensation to support you and your family may be worth it if you have a dream and a great idea.

Woman standing in front of her store wearing an apron.

Ways Female Entrepreneurs Can Recover After the Pandemic

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Woman-owned businesses – especially those owned by women of color – bore the brunt of the recession caused by the COVID-19 pandemic, and need help to claw their way back.

The reason women-owned businesses in the U.S. were hit harder than most is because, according to a study by the U.S. Chamber of Commerce Foundation, many of the businesses are run by “mompreneurs” – in fact, 90% of them have no employees other than the business owner and involve selling merchandise over the internet. Additionally, many women started their own business during the pandemic because they got furloughed or laid off, and childcare centers closed.

Access to Funding Curtailed

This made getting loans from the Paycheck Protection Program or SBA impossible for them, as those loans require years in business and a certain number of employees. A number of grant programs exist for women-owned businesses, but according to a study of nearly 1,200 women-owned businesses by Gusto, the ones that are out there are not enough to help sustain the number of women-owned businesses. 

According to Gusto’s survey, the vast majority of women-owned businesses (68%) funded their business through their own personal savings.

“Women are disproportionately owners of foot-traffic-based companies,” said Sarah Gustafson, lead data scientist at Gusto. “What we saw is that female-owned businesses have had larger net losses in their headcounts [during the ongoing pandemic] than male-owned businesses.”

Shouldering the Burden

While women-owned businesses face the same challenges as any small business owner, they also face unique challenges such as childcare. In particular, minority women drove business creation during the pandemic, according to Gusto’s study. Nearly half (47%) of businesses started in the past year are minority-owned. 

Their reasons for starting a new business were overwhelmingly driven by financial imperatives. Minority women were more than twice as likely (35% vs. 17% for others) to start a new business because they were laid off or worried about their financial situation. Almost a third (29%) of these women are the sole providers of income for their family. 

The main reasons given listed by Gusto for women to start their own businesses are:

  • 58% of women want more control over their work schedule;
  • 24% wanted to start a business that they could pass on to their families;
  • 37% were looking to improve their financial opportunities;
  • 19% lost their jobs, and
  • 9% didn’t have any other job opportunities. 

Steps Towards Economic Recovery

Obviously, not all women-owned businesses are the same, but whether you own a retail store, catering service, an office-based company or beauty supply shop, there are still uniform steps you can take, as well as apply for grant programs that are available to you.

The first step you may want to take as a woman business owner is to certify yourself as such with the Small Business Administration so that you can compete for lucrative contracts:

  1. Officially certify yourself as a woman-owned business with the SBA. This will qualify your business for the SBA 8(a) Business Development Program – a program that allows women-owned businesses to:
  • Compete for set-aside and sole-source contracts in the program;
  • Get a Business Opportunity Specialist to help navigate federal contracting;
  • Form joint ventures with established businesses through the SBA’s Mentor-Protégé Program;
  • Receive management and technical assistance, including business training, counseling, marketing assistance, and high-level executive development;

You can compete for contract awards under multiple socio-economic programs, as they apply. To qualify for the program, you must have a personal net worth of $750,000 or less and a gross income of $350,000 or less. 

Grants for Women-Owned Buinesses

There are also several private grants, many of which are specific to women-owned businesses, that you can apply for as the economy slowly recovers from the pandemic:

The Eileen-Fisher Women-Owned Business Grant

The Eileen-Fisher Women-Owned Business Grant awards five grants up to $120,000 per year to woman-owned companies that promote social and environmental change. Your business must have existed for at least three years, and you cannot have earned more than $1 million in annual profits.

Visa’s She’s Next program

The Visa She’s Next grant is awarded to African-American women-owned businesses. In order to apply, you must have been in business for at least two years, be a B2C company, and have a minimum revenue of at least $24,000.

Amber Grants

The Amber Grant is one of the easiest grants to apply to. It is geared towards female entrepreneurs who are planning to launch small, local businesses and awards $10,000 every month. At the end of the year, one of the monthly winners is selected for a $25,000 grant. To apply, all you need to do is go to the website and explain the purpose of your business.

Cartier Women’s Initiative Award

The Cartier Women’s Initiative awards 21 female entrepreneurs every year with one-on-one expert coaching, business workshops, media coverage for the entrepreneur and their business, and prizes ranging from $30,000 to $100,000.

IFundWomen Universal Grant program

The IFundWomen Universal Grant Program  partners with several different organizations to bring grant opportunities to women-owned small businesses which has a grant pool of over $8M. Grants are available to many different types of women-owned businesses.

GrantsforWomen.org

GrantsForWomen.org  is a versatile program that is a database of grants specifically for women-owned businesses. Not all grants are specifically for women-owned business owners, but they offer funding options in a wide range of industries. 

37 Angels 

37 Angels is a great program for women entrepreneurs who are seeking start up capital for their respective businesses, as it is made up of female angel investors that invest only in women-owned small businesses. The organization is dedicated to assisting female entrepreneurs who do not qualify for traditional lending, and offers grants as large as $150,000. 

Belle Capital 

Belle Capital is a private equity firm focused solely on women-owned businesses, and is ideal for female entrepreneurs who plan to take their company public or have a big exit strategy planned over the next few years. Some of their criteria include the feasibility of the business reaching $20 million in revenues over the next five years, and high capital proficiency. 

Going Forward

While there are grants available to women-owned businesses, female entrepreneurs also need help from the government. According to Gusto’s survey, most women-owned businesses favor President Biden’s proposed infrastructure plan that aims to increase broadband access across the nation, as the number one concern for women-owned businesses is having greater access to the internet. 

Hiring concerns and the need for more training, particularly in the eCommerce space, also represent the greatest need for women-owned businesses, as well as expanded access to capital, both in the traditional lending space and the private equity market.  

You can find training courses online (and some of them are free!) on how to use eCommerce for your business and how to best navigate your way through social media.

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What Independent Medical Practices Need to do to Survive

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Even before the COVID-19 pandemic hit, independent medical practices were in critical condition as large hospital systems implemented cost-effective, value-based care systems and hoarded patients’ medical histories – moves that forced many independent physicians who couldn’t compete to give up their practices and join them.

Contrary to popular opinion, independent medical practices were not immune to the effects of the coronavirus pandemic, as patient visits and needs for services plummeted. According to the American Medical Association, 2% of primary care practices closed and another 2% considered bankruptcy at the end of August 2020.

So how are independent physicians supposed to prevent themselves from becoming W-2 employees in the wake of competitive challenges posed by large hospital systems, as well as the task of finding new patients as the pandemic winds down? Here are some tips for survival, based on our conversation with Marni Jameson Carey, executive director of the Association of Independent Doctors, and data from the AMA. 

Merge Your Practice Due to the Threat of Value-Based Care

  • Perhaps the most important action an independent medical practice can take is to merge or form a strategic alliance with other independent practitioners in order to spread the risk posed by value-based care – a system designed to lower the cost of healthcare by charging patients for outcomes rather than service. 
  • In such a system, insurance companies as well as the Center for Medicare and Medicaid Services (CMS) set standards of payments to doctors to incentivize them to keep costs down by cutting redundancies in treatment, offering pre-paid bundled services packages to patients for cancer care and surgical procedures, and focusing on preventative care. If doctors go over the stated annual amount, then the cost of treatment must come out of their pockets. In short, doctors are rewarded and paid to keep patients healthy year-over-year, rather than paid for services rendered. 
  • The Healthcare Payment Learning & Action Network, which was established by the CMS in 2015, aims to have 100% of providers in the US participating in value-based contracts by 2025. While value-based care has become the wave of the future in medical care, it has become the biggest threat to the existence of independent doctors, who may not be able to afford to offer discounted services, said Carey.
  • Large hospital systems that own a network of salaried physicians are in a better position to offer value-based care because of their economies-of-scale, said Carey, and that makes it harder for independent practitioners to keep up.

Marni Jameson Carey, executive director of the Association of Independent Doctors, says that independent doctors should band together to offer value-based care.

“I have a problem with value-based care philosophically because smaller practices tend to have established patients, and as doctors get older, their patient bases tend to get older and sicker, not younger and better,” she said. “So, as a doctor, I’m now being measured against my prior year, even though my patients are getting older and sicker, and I’m doing my best. Value-based care goes against the grain of the idea that every year you have to do better than the year before, when natural evolution tells us that people get older and eventually die.” 

The answer, she said, is for independent practitioners, be it primary care physicians or specialists to “Ally with other independent doctors and share risk as a consortium, but still stay independent,” she said. 

According to a recent article from the Advisory Board, a physician advocacy group that promotes equity in healthcare practices, “As care delivery becomes more complex and value-based arrangements require more upfront resources, very small practices are more likely to struggle financially and be aggregated by larger entities. This may mean hospitals, yes, but it doesn’t only mean hospitals. In fact, many independent physicians are acting as aggregators themselves—buying up struggling practices and offering models that appeal to these fiercely independent shareholders.”

Independent doctors should know that acquiring another practice in order to scale up business may require financing. In such a case, physicians should consult with their accountants as well as seek financing from either traditional lenders or alternative lenders such as Kapitus, which offers Helix Healthcare Financing – lending specially tailored for independent healthcare practices. 

Make Healthcare Records Portable 

Electronically Updating the medical history of patients is the bane of most doctors’ existence, because it involves hours of tedious paperwork and filling out forms. To add to that frustration, independent doctors often have to deal with the fact that their expensive electronic health records (HER) systems are not compatible with those of the hospitals to which they refer their patients. As a result, hospitals don’t know their patients’ medical histories and order duplicate tests and perform redundant procedures. 

“This is one of the ways hospital systems try to encourage independent doctors to join them and become employed physicians, so that they don’t have to invest in electronic health record systems that may become obsolete,” said Carey. “Hospitals like to own patient data and freeze out other providers not within their system so that they capture patient share and make it hard to share the data with doctors who might take business from them.” 

The answer to this, she said, is for independent doctors to adopt an EHR policy that makes it easy for patients to have access to their own medical history – something many doctors are afraid of doing out of fear of violating the Health Information Portability and Accountability Act (HIPAA). 

“If you look up the HIPAA laws, it’s not about patient privacy, it’s about the patient’s access to information,” said Carey. “The law has been misconstrued to mean that patients can’t even have access to their own information, and that isn’t true. The patient should be able to have the data, so when the patient goes to the hospital or a specialist the patient has the information with him or her, whether it’s on a thumb drive or on a smart phone. So, the answer to this is to make sure patients have access to their own records and to sure information isn’t siloed by hospitals.”

AthenaOne Electronic Health Records Software

For independent doctors who are still using paper files to store patient records, adopting EHR software should not be a difficult task. Some of the most popular EHR software systems out there include AthenaOne and RXNT.

Make Telehealth a Featured Part of Your Business

Even before the nation went on lockdown due to the coronavirus, health insurance giant Kaiser Permanente revealed in 2018 that slightly more than 50% of doctor visits by its participants were through telehealth, and that the number of telehealth appointments shot up by 3700% from 2019 to 2020. The bottom line is that telehealth is here to stay, especially in rural parts of the country where a trip to the doctor’s office may require a long drive. 

“I’ve been told by our doctors that they are doing telehealth visits over their phones and over Zoom, and that they bill for the service and it isn’t complicated,” said Carey. “I know there are companies out there that want to make it complicated and want to sell expensive services, but this really isn’t a technology issue. I do know that you can’t just run around doing telehealth visits, that you need to be an established patient with a practice before that provider can do a telehealth visit with you and determine whether a telehealth visit would be appropriate.”

Make Prices Transparent

Several states have passed laws requiring medical practices to inform patients of the price of their services before they are rendered. This prevents patients from receiving billing surprises after undergoing surgery or another medical procedure. The patient may believe that the surgery is covered by insurance, only to find out afterwards that one of the specialists involved in the surgery, such as the anesthesiologist, for example, may not accept insurance and receive a bill for thousands of dollars for that service. 

States such as New Jersey, for example, have passed the Out-of-network Consumer Protection, Transparency, Cost Containment and Accountability Act in 2018, a law that independent New Jersey doctors claimed threatened their survival because it allows consumers to also seek an outside arbitrator to determine whether the cost of medical services are reasonable. 

Carey said that despite the initial objections to these laws, price transparency among independent physicians – even ones that do not accept insurance – is necessary to ensure their survival because it encourages competition among physicians as well as hospital systems, which inevitably will drive down prices of medical services. 

Automate Where you can 

Some independent physicians are still stuck in the dark ages when it comes to technology but should automate some of their systems with software to make their lives easier and give them more time to spend with patients. These systems include automated appointment reminders, patient intake forms and billing – systems that large hospital systems already automate themselves. 

In summary, survival may not be easy for independent medical practices going forward, as large healthcare systems continue to gobble up small practices. Following steps for survival such as partnering with other independent doctors and keeping up with technology can prevent an independent doctor from becoming a W-2 employee.

Two Businesses men shaking hands

Small Business Acquisitions and How to Finance Them

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Acquiring another business can be a complicated task, but one that could very well be worth the effort to ensure the survival of your small or micro business. 

The time may also be right for considering an acquisition, as interest rates are low, making borrowing for an acquisition relatively cheap. Additionally, according to the most recent NFIB Small Business Optimism Index, the net percent of owners raising average selling prices increased 10 points to 36%, the highest reading since April 1981. 

While deal volume is not back at a pre-pandemic level, according to the NFIB, sectors such as liquor stores, home improvement businesses, e-commerce sites, medical businesses, manufacturers, and distributors are seeing high activity.

Reasons to Consider an Acquisition

One reason you may consider acquiring another business is that, now that we are (hopefully) in the waning days of the COVID-19 pandemic, your business may very well have taken a financial hit, and you may need to scale up by purchasing a similar business if you wish to survive going forward. 

Purchasing a similar business would give you an entirely new stream of revenue and a new pool of clients, as well as increase branding in your market – even if you’re a microbusiness such as an independent restaurant or retail store owner. If you’re an accounting or law firm or other type of business services firm or medical practice, it may even increase your client base to other regions of the country, depending on the location of the business you are seeking to purchase. 

Another potential reason to make an acquisition is that you may want to complement your business by offering additional services. For example, if you own and operate a construction firm that specializes in building houses, you may want to purchase a company that specializes in masonry and paving work so that you don’t have to subcontract that work whenever you build a new home.

Due Your Due Diligence

If you’re interested in making a strategic acquisition, your first task will be to work with an M&A advisor or even an accounting firm. While most banks are not interested in M&A advisory work for small businesses, there are several advisors that do specialize in handling acquisitions for small to medium-sized businesses (SMBs). 

Talk to your advisor about:

  1. Why you want to make an acquisition;
  2. What type of company you are seeking to purchase; 
  3. The location of the company in which you wish to purchase;
  4. The feasibility of merging your company’s balance sheet with the acquired company;
  5. The value of similar businesses in your industry and in your geographic location;
  6. A realistic amount you wish to spend on an acquisition;
  7. The logistics of merging your company with another, and
  8. How to fund the acquisition through debt.

A reputable M&A advisor should be able to do the due diligence for you and find you a list of companies in your area that may be a compatible target for an acquisition based on their business models, revenue, management structure and other factors. The advisor should also come up with a fair value of the acquisition target based on the financials of the target business. 

Create a Combined Business Plan 

Once you and your M&A advisor has found an acquisition target that meets your criteria and agrees to be acquired, you will have to produce new short- and long-term business plans for your new, combined entity in order to get financing to fund the acquisition. The basic ingredients of a business plan for a newly combined business typically include:

#1 Creating a New Management Team, Staff

Discuss with the head of the company that you are looking to acquire the logistics of combining your staff. Start with who will oversee the new company, and what functions each of you will have. If you are a microbusiness and the new company will only have 6 or 7 employees, then combining your respective workforces should not be too challenging. If your newly formed company will have 20 or more employees, you may wish to create new departments with new department heads, with each serving a different function.

Staffing redundancies, such as two people from each respective company essentially serving the same purpose, may be a red flag in the eyes of a prospective lender, so make sure your new staff structure is as efficient as possible. These factors will be crucial in the contingency –or 12-month plan– that you will need to present to a prospective lender to finance your acquisition.

#2 Creating a New Mission Statement in Line with Your New Capabilities

Your new company’s mission statement should detail the new array of products that you offer, how employees approach their work to reach goals and why your new company is improved in the way it provides products and services as a result of the acquisition. 

Next, ascertain the capabilities that your new entity has to offer in terms of sales. For example, the company that you are acquiring may offer eCommerce capabilities, while you have more retail locations. Post acquisition, your new company will offer both and your mission statement needs to reflect this. Your new company may now offer business-to-business, business-to-consumers capabilities or combinations thereof as a result of the acquisition. In addition to being a key component of your mission, these factors should be the benchmarks for your five-year business plan.

#3  Showing That You Can Absorb Debt

Typically, the company that you acquire will have some debt that you have to absorb. In order to get financing for your acquisition, you have to convince the lender that you can handle that debt, especially since you are using debt to finance the acquisition. 

Joshua Jones, Chief Revenue Officer at Kapitus, said the ability to take on new debt is key to acquisition financing.

“The [lending] bank is going to say, ‘does this asset (the acquired company) cover the new debt service on that business?’” said Joshua Jones, chief revenue officer at Kapitus. “Because now, you’ve just applied a whole new payment (through the financing of the acquisition) and the best way to show in your business plan that you can absorb that debt and increase your gross profit is either through efficiency gain or scale.” 

#4 Projecting Gross Income of the Newly Formed Company

Work closely with your accountant or M&A advisor to project a 12-month income. There are various ways to project income, and it is typically far more complicated than simply adding the gross income of your company to that of the company you are acquiring, so talk to a financial expert on this. 

“An effective planning tool is through the use of projections,” said Michael Kuru, a CPA specializing in family-owned businesses. “When a business is acquired, there is a strong indication of the gross income that should be generated. The experienced business owner should have an idea as to the underlying cost to generate that income.’

Obtaining Financing for an Acquisition 

Generally, the best type of financing for a small business acquisition would be an SBA loan, with the most common being the 7(a) loan. You may also want to consider a business loan, since the requirements for a SBA loan are typically stringent, require a high credit score, and are generally not easy to obtain. 

According to Jones, however, “An SBA loan will always be the most seamless with the acquisition strategy because it is going to provide the length of payback that’s more applicable to an owner buying a business and having the available profits to pay down the loan as a percentage of profits over time.”

SBA loans are typically offered by two different entities – a brick-and-mortar bank, or an accredited non-bank SBA lender (of which there are only 14). Many alternative lenders such as Kapitus do not directly provide the SBA loan, but have built a wide array of accredited lending partners and uses modern technology to underwrite, approve and manage the loan disbursement and repayment process, often in a timeframe that is much quicker than that of a traditional lender and often has fewer requirements.

Executing an acquisition could be an expensive and extremely complicated task. At the very least, however, buying another small business could help your business survive in the post-pandemic world. At most, an acquisition could help you thrive as it would allow your company to expand, scale up products and offerings, and ultimately pull in new business.

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