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.


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.


Small Business Loan Application Checklist | Updated for 2019

Building and running a small business is hard. It takes conviction, leadership, sound management and, every so often, a much-needed injection of financing. In both good and lean times businesses are often faced with the decision to pursue some type of financing. However, applying for and acquiring small business loans and alternate financing can often be daunting – even if you’ve done it before. And traditional lenders do not make that experience easy.

The good news is that getting financing doesn’t have to be this hard. We help thousands of small businesses everyday and want to share secrets of getting good financing options quickly. So, we have compiled a simple checklist of actions you can take to make the process fast, simple and easy.

However, as you get ready to apply for a small business loan, you should consider the following questions carefully to be sure you are not surprised by any unforeseen requests or adverse decisions from lenders.

Six questions every business must ask before applying for a small business loan | Download PDF

1. Should you apply for a small business loan?

While a small business loan is a great way to reduce the pressure on cash flows, you could have viable alternatives for relieving cash flow crunch like selling debt owed to your business and renegotiating contracts to allow for longer payment terms. Also, make sure you have considered all alternate sources of financing including friends and family.

2. Is a small business loan good for your business?

Understand the effect of repayment of small business loan on your cash flow. A loan does not change the fundamental working of the business. It strengthens a fundamentally sound business and quickly breaks a business that is fundamentally unsound.

3. Can you qualify for a business grant?

Unlike loans, you don’t have to pay back grants. Before applying for a small business loan, see if you qualify for a federal or private small business grant. However, grants can be highly competitive and may not fit your financial time horizon.

 4. What types of small business loans are there?

There are over a dozen types of small business loans and alternative financing options for small business. The most popular options are government-backed SBA loans, revenue-based financing and factoring. Download this eGuide to learn more about different types of small business financing.

5. When should you apply for a small business loan?

Apply only once you have determined that a business loan will help strengthen your business, and you understand the different types of financing options like Small Business Loans, Revenue Based Financing, Factoring, and Equipment Financing. Each of these options have unique requirements so make sure you understand them well before speaking with a lender.

6. Should you work with a small business loan broker?

Brokers are a great resource to get offers from multiple lenders. However, many online marketplaces like Kapitus, will get you offers from multiple lenders without the additional broker fee which is borne by the borrower.

Small Business Loan Application Checklist| Download PDF

1. Run a quick cash flow analysis on your business account

Cash flows are one of the primary indicators that lenders use to understand the health of your business. Showing 3 to 6 months of positive cash flow can get you approved faster. It can even get you better financing terms for your small business loan. You can learn more about cash flows and ways to improve them in “How to Prepare Your Small Business for Cash Flow Needs.

2. Collect at least 3 months of bank statements

Your business accounts are another good indicator of your company’s financial health. Generally, lenders want to see a positive daily balance on your bank statements. Remember, a well managed cash flow will directly improve your bank accounts.

3. Identify unusually large deposits to your bank accounts and gather supporting documents to help explain them

While presence of unusually large deposits can delay finalization of loans, they are not necessarily bad. Many businesses, like construction companies, can easily explain their presence on the bank statements. Some businesses understandably have large swings in deposits and credits to their account. If your business is like that, you can expedite your loan application process and get really good terms on your small business loan by providing a copy of your account receivables and future contracts.

4. Get a copy of your free credit report and make sure there are no red flags

A strong personal credit goes a long way to assure any lender about the fiscal responsibility of the person running the business. You can get a free copy of your credit report from annualcreditreport.com. If you find any incorrect information on your credit report, contact each credit reporting agency (Experian, Transunion and Equifax) immediately to correct the issue. Keep in mind that while small delinquencies are understandable, lenders are uncomfortable with statements that show delinquencies on child support or recently dismissed (not discharged) bankruptcies.

5. Reduce the number of lenders to whom you owe money

Too many lenders pulling money from the business can create severe strain on its cash flow. Lenders want to know that the money they provide will help grow your business and not put additional strain on its daily operations. You may want to wait to finish your current loan obligations before going back to the market to raise more capital.

6. Resolve any open tax liens

Unresolved open tax liens can hurt your ability to obtain financing. If possible, try to get a payment plan on any open tax lien. A payment plan on a tax lien is far better than an open unresolved tax lien.

7. Get three business references

Trade references help to establish authenticity and credibility of your business. If you rent commercial space for your business, make sure that the landlord is one of your references.

8. Have tax statements handy when applying for a large sum

Lastly, businesses contemplating borrowing large sums over $75,000 should get a copy of their last year tax statement and business financial statements.

Obtaining small business loans doesn’t have to be a daunting process. Use this checklist before applying for a business loan or alternate financing and get the funds your business deserves.


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.


Everything You Always Wanted To Know About Income Statements But Were Afraid To Ask

Editor’s Note: This is one of an eight-part series about key financial terms all business owners should know.

Chances are you’ve heard the word “Income Statement” at some point during your entrepreneurial journey. Maybe you’ve even reviewed one from your CPA or CFO (If so, bonus points!). But, if your eyes glaze over a bit when you hear the term.  Or, if you’re not entirely sure how an income statement is different than a balance sheet.  You’re in the right place.

What is an income statement?

It’s a financial report that shows a company’s financial performance over a specified period of time.  Typically income statements are reported on a monthly, quarterly, or annual bases. However, a report can address any time period. An income statement shows revenues and expenses from operating and non-operating activities, along with net profit or loss. Income statements are sometimes referred to as “profit and loss statements.”

Why are Income Statements Important?

Income statements provide an easy-to-review report of your company’s performance over a period of time. Comparing multiple income statements for multiple periods of time can give you insight into how your business is doing overall. For example, if sales are up but expenses are up even more, your net profit may be down.

How can Income Statements Impact Financing Options?

Because they show performance over a period of time, many lenders use income statements to assess how a business’ sales and net income are changing over time. For this reason, many potential lenders require multiple income statements to review.  They could potentially request three or more years’ worth, depending on the sum you’re financing or raising.

If you’re an entrepreneur exploring financing options, start reviewing your income statements. It’s best to review with your CPA or CFO, but if you don’t have one, use your accounting software to generate the monthly, quarterly, and annual reports now so you’re well-versed on your company’s financial health before you begin conversations with outside parties.

Ask An Expert

Bradley Klingsporn is a practicing CPA and Co-Founder/Co-Owner of Aardvark Wine Lounge in Green Bay, Wisconsin, so he knows a thing or two about why income statements are important to entrepreneurs.

Why is it important to have a handle on your income statement if you’re looking to raise capital?

Klingsporn: Not every company is a tech startup that can operate in the red for years and keep raising capital. Most businesses need to show profits or at least growth to convince investors to give you their money. Keeping close tabs on your income statement can help you know when it is a good time to raise capital and when it might be best to wait a few weeks if you expect some significant improvements.

What’s the biggest misunderstanding about income statements that you see from other entrepreneurs?

Klingsporn: Many small business owners have a difficult time differentiating regular ebbs and flows from trends. There is no hard and fast rule to determine whether a bad month is just a bad month or if it’s the start of a trend (the same can be true of good months). The income statement is a starting point that is used to begin understanding where the business is, but requires additional information to determine what that means for the future. For example, restaurants and bars will often see increased sales in months that have five weekends – to interpret these increases as growth could lead an owner to make capital improvements or hire additional staff that they may not be able to afford when the following month sees a decrease with only four weekends.

Give Me More

Just like it’s easier to travel in a foreign country when you know the language, it’s easier to raise capital (or secure any kind of funding for your business) when you’re familiar with key financial terms and their real-life applications. Want to get up to speed on your finances? Check out the other articles in this series which cover: turnover ratiodebt to income ratiopayables turnover ratiodebt service coverage ratiocurrent ratiocash flow statements, and inventory turnover ratio.


3 Issues Women-Owned Businesses Should Be Watching Closely

For women-owned businesses, there are three potential challenges to keep in sight as we move throughout the year.

1. Continued interest rate hikes

The Federal Reserve has maintained a steady course of raising interest rates to keep pace with economic growth. The Fed hasn’t made any firm commitments – yet.  But, further adjustments to the federal funds rate may be on deck for later this year. That could be costly for female business owners seeking financing.

Women already face a tough business lending environment. According to the latest Private Capital Access Index (PCA Index) from Dun & Bradstreet and Pepperdine Graziadio Business School, just 18 percent of women entrepreneurs were able to get bank loan financing during the third quarter of 2018. Fifty-seven percent of women said the current business financing environment is hindering their business growth, compared to 42 percent of all business owners surveyed.

Twenty-four percent of women said additional rate hikes would restrict their growth further.  In addition 15 percent believe that rising rates would make raising capital more difficult. Women entrepreneurs who are considering a loan in 2019 should be watching Fed policy and rate movements closely. Additionally, they may want to explore bank loan alternatives, such as revenue-based financing or factoring to meet financing needs.

2. Midterm election results

The 2018 midterm elections resulted in some historic wins for female lawmakers, with nearly 120 women in Congress this year. That could be a boon if newly elected senators and representatives promote initiatives designed to advance female-lead businesses.  Business owners should keep their ears open and listen out for new grant and lending programs or policy shifts that increase the number of government contracts awarded to women are on the horizon.

The midterm elections may also have a broader impact for all business owners in terms of how Congress may shape trade, tax and healthcare policy moving forward. Businesses may still be adjusting to the latest round of tax and healthcare reform but the possibility of further changes should be firmly on their radars. The imposition of new tariffs could also result in higher operating costs for businesses that rely on imported goods.

3. Changing economic conditions

While the economy is still going strong, 2019 may bring a slowdown in the pace of growth. That, in turn, could directly affect business owners, particularly women.

According to the Private Capital Access Index, women business owners are more likely to struggle with cash flow compared to other businesses. Twenty-eight percent reported issues with receiving payments from customers, versus 23 percent of small businesses overall. A slower-growing economy could raise that figure higher if vendors or customers are sluggish in making payments because they’re dealing with cash flow issues of their own.

As we move through 2019, women business owners may want to revisit their invoicing and payment policies. Shortening payment terms, imposing late fees or accepting a broader range of payment methods could help speed up payments and avoid cash flow lags. Being prepared for these kinds of bumps can help make 2019 a smoother, more successful year for women-owned businesses.


Get Your Construction Business Ready for the Spring

If you’re a contractor or own a construction business, you’ve likely been wondering what the this year will bring in terms of revenues and opportunities for growth. While many forecasts are calling for a slight economic slowdown in 2019, construction starts are still expected to hold relatively steady. As you look ahead to warmer months, here are three things to review as you prepare to ramp up your business this spring.

Update your tech

Smart technologies, AI and automation continue to expand their influence on the construction industry. Some new opportunities to update your business technology include:

  • Streamlining project management by using cloud-based solutions.
  • Utilizing drones for site planning and survey data enhancement.
  • Investing in smart safety equipment, such as wearables to track worker movements and fatigue levels.
  • Updating your inventory tracking software to reduce materials waste.
  • Using building information modeling software to streamline project design.

While some of these options are more hi-tech (and big-budget) than others, if you run a smaller firm, consider tech upgrades that can deliver a solid return on investment without a large outlay of cash. For example, updating your company’s website is something you may be able to do for a few hundred dollars, and up-to-date information and a fresh look might help attract new customers.

Review expenses and pricing

Construction materials didn’t get cheaper in 2018. Through July, prices had risen by nearly 10 percent over 2017’s figures, according to Associated Builders and Contractors. With uncertainty surrounding tariffs and foreign trade policy, materials such as lumber and fuel might become more expensive.

Higher prices means a higher cost of doing business and a potentially smaller profit margin. When planning for the busy season, consider how rising prices may impact revenues and cash flow, in both the short- and long-term.

Specifically, think about whether you’ll need to adjust your pricing to accommodate a jump in material costs. Would a price increase allow you to remain competitive in your local construction market? How would that price increase be received by clients? Will you enhance the value you provide as your rates rise?

At the same time, look for areas where you can reduce costs. Reach out to suppliers to ask for a discount or renegotiate terms. Recycle and repurpose materials whenever possible. Consider whether it makes sense to keep maintaining older equipment or replace it with something newer to reduce repair and maintenance costs. These kinds of changes may add money back into your cash flow and create a healthier bottom line.

Assess your capital needs

With interest rates projected to rise again this year you may want to pursue financing sooner instead of later. The lower the rate you’re able to lock in, the less your financing will cost over the repayment term.

Get clear on your needs and what type of financing may work best. For example, you may want to buy a new fleet of work vans or invest in a new backhoe. Or, you may just need cash to cover everyday operating expenses during the winter months if that’s your slower building season. Equipment financing might be more appropriate in the first scenario, while a working capital loan may be better suited for short-term funding.

Remember the ROI and the overall cost when considering financing for your construction business. Before taking out a $1 million equipment loan or a $100,000 working capital loan, estimate the potential payoff, either in preserving cash flow or increasing revenues.

You also need to be sure that the payments for an equipment loan, or any other type of financing, fit your business budget. And of course, review the interest rate and fees charged by different lenders to help you secure the best deal.


7 Reasons Asset Based Financing Might Make Sense for Your Fast-growing Company

Fast-growing businesses may face a problem financing an expansion. But asset based financing may offer advantages over more traditional methods of borrowing money. Here’s what you need to know.

How asset based financing works.

Imagine that you are running a retail apparel company and need cash to grow your business. Instead of applying for a loan based on the company’s credit history, you might instead ask for financing secured by the inventory you hold. Clothing retailers usually hold significant levels of inventory (dresses, jeans, etc.) which may be used as loan collateral.

Many retailers also operate as wholesalers to smaller firms and so usually have unpaid invoices outstanding. Companies may also be able to use those invoices to help finance their own operations by contracting with an intermediary known as a factor. The factor buys the invoices at a discount in exchange for providing immediate cash.

Here are seven reasons consider asset-based financing.

What are the benefits of asset based financing?

When compared to traditional forms of lending, asset based financing can can offer a wide array of benefits – from fewer restriction, to cost savings, to less paper work. While it is not the best fit for every business, it does make sense to include it as part of your due diligence when selecting the best financing product for your business.

Here are seven reasons to consider asset-based financing.

1. Potentially lower costs

Asset based loans are secured loans. And, therefore, may be far cheaper than traditional loans which are usually based on the company’s financial history. If a loan is based solely on the credit history of a firm, it is considered an unsecured loan. As such, the borrower will get charged a higher interest rate. That’s because the bank may be assuming more risk when they make an unsecured loan.

The secured versus unsecured loan structures are similar to consumer loans, in that home loans may be cheaper than credit card debts. With a home loan, if you don’t pay your mortgage the bank may repossess your home; however, with credit card debt there’s typically no security deposit backing up the loan.

2. Less paperwork

While obtaining a traditional business loan might require you to document the financial history of your company’s operations, an asset-based loan likely would not. In other words, borrowing against the value of your inventory might be an easier way for a newer company to get financing than trying to get a traditional loan.

3. Fewer restrictions than traditional loans

Many loans have restrictions on how the money from the loan gets used. For instance, a bank may ask why you need a conventional loan (also known as a term-loan because it is given for a specified period) and how you intend to repay it. If you take out a term-loan and tell the bank you want to use it to remodel your retail stores, then that is how the bank expects you to use the proceeds. The good news is that asset based loans typically may have fewer use restrictions.

4. More flexible repayment terms

You must eventually pay back any loan to the lender. However, not all loans are created equally. Asset based loans often don’t require the entire loan amount to be paid off according to a fixed timetable, often known as an amortization schedule. Term loan payments (including a pay-down of the principal balance) must be paid each month. Asset-based loans often have more flexible payment terms, allowing businesses to pay off the debt at a time that is most suitable given their cash flow. The result is potentially more flexibility for companies using asset based financing.

5. Streamlined balance sheets

If you take out a traditional loan, then the balance due appears on your balance sheet. Some asset based financing does not get recorded that way. For instance, if you sold your outstanding invoices to a factor in exchange for immediate cash, there would be no balance to show on your firm’s balance sheet. All you’d need to do is to note how you managed this financial transaction in a footnote on the financial statements. This is known as off-balance sheet financing.

6. A good way to finance working capital.

Companies experiencing fast growth may find it hard to get additional working capital via revolving lines of credit. On the same end, as the need for working capital increases your firm may have higher levels of inventory and larger invoices due from customers. You may use inventory and larger invoices as collateral to finance increased working capital needs.

Feeling more confident about your business to go shopping for a loan? Before you start looking you should understand what factors impact terms of your loans.


Everything You Always Wanted To Know About Cash Flow Statements But Were Afraid To Ask

Editor’s Note: This is one of an eight-part series about key financial terms all entrepreneurs should know. 

Never heard the term “Cash Flow Statement”? The good news is that it’s almost exactly what it sounds like! And, by the end of this article, even a financial-terms-novice can feel comfortable reviewing and discussing a cash flow statement with his or her CPA or CFO.

Feeling comfortable with a cash flow statement is imperative, because these reports are critically important to your business. In fact, CPA and entrepreneur, Bradley Klingsporn, founder of Green Bay’s Aardvark Wine Lounge, says “Many small business owners and small business accountants believe that the cash flow statement is more important than an income statement.” That’s because, “[if] the business is making huge profits, but doesn’t have anything in the bank, it won’t be able to pay its bills and it could still go under. Keeping a close eye on the cash balance is as, if not more, important than keeping an eye on the bottom line.”

What exactly is a cash flow statement?

A cash flow statement is a financial report that shows the amount of cash and cash equivalents used by a company in a given period. Cash flow statements contain three main categories. The three categories are cash flow from:

  1. operating activities
  2. investing activities
  3. financing activities.

Taken together, these three groups account for all cash coming into and going out of a business.

Why are cash flow statements important?

Staying on top of cash balance is critical to the health of a business.  This is of particular importance if you’re a business who is likely to raise money at some point. And knowing your “runway” — or how long you’re able to operate with the cash you have on-hand at the moment — is key.

When reviewing cash flow statements, entrepreneurs should be asking if the cash flows are sustainable. “If cash decreased in the period, was this because of a change that period? For example a capital purchase or large debt payment.  Or is this going to persist? For example, regular loan payments)?” Klingsporn asks. “If cash decreases are expected, is there a need for additional cash inflows? If so, how will the business get the additional cash?”

How can cash flow statements impact your financing options?

Cash flow statements allow potential financing partners to assess a company’s general health, including how quickly your company will be able to pay off outstanding debts. Although it’s not imperative to have a high cash flow to borrow money, lenders may favor companies that do. The more positive a cash flow statement looks, the easier time you likely to have securing favorable financing options.

Can I create my cash flow statement?

If you’re in the early stages of looking to raise capital and have never put together or reviewed a cash flow statement, Klingsporn’s advice is to bring in an expert. “Hire an accountant,” he says. “If you don’t want to do that, the basic process is to identify cash inflows and outflows that don’t affect net income and expenses and income that doesn’t affect cash. The former would include principal loan payments, cash from new debt, and purchases or sales of capital equipment. The latter would include depreciation and changes in receivables or payables. If that sounds confusing, see the first sentence.”

What’s next?

Just like it’s easier to travel in a foreign country when you know the language, it’s easier to raise capital (or secure any kind of funding for your business) when you’re familiar with key financial terms and their real-life applications.  Check out the other installments in this series covering The next installment of this series, where you will learn everything you wanted to know about turnover ratiodebt to income ratiopayables turnover ratiodebt service coverage ratio and current ratio


Want a Better Credit Score? Put Banking and Credit Card Alerts to Work

Staying on top of your personal and business credit scores is important if you plan to apply for business financing. Setting up banking and credit card alerts can make the job easier.  Better still, it can also potentially lead to an improvement in your credit rating.

If you’re not already using banking and credit card alerts to your advantage, here’s what you need to know.

How Alerts Can Help Improve Your Credit Scores

Personal and business credit scores are calculated differently.

Your personal FICO score, for instance, is based on payment history, amounts owed, length of credit history, types of credit used and new applications for credit. Business credit scores focus on different factors. The Experian Business Credit Score looks at your credit obligations to suppliers and lenders, legal filings involving your company and public records. Dun & Bradstreet’s PAYDEX Score is determined by how well your business pays its bills.

While personal and business credit scores can measure different things, alerts can help you stay on top of both by encouraging you to be more conscious of your accounts and credit activity. When you’re paying more attention to your credit, you may become more intuitive about what can help or hurt your score. (That’s a good thing, considering that 72 percent of business owners don’t know their business credit score, according to a Manta survey.)

Getting Started With Banking and Credit Alerts

Your bank and credit card company may allow you to set up many different kinds of alerts or notifications. When you consider the things which are most likely to impact your credit scores, specific alerts may prove useful:

  • Bill due date notifications
    Payment history is the central factor in influencing your PAYDEX business credit score; it also carries the most weight for personal credit scores. Set up bill payment alerts to help you avoid late or missed payments, which could negatively impact your credit score. Even better, ensure you pay your bills on time by pairing alerts up with automatic bill payment through your bank.
  • High credit card balance notifications
    After payment history, your credit utilization is the next most important factor for scoring personal credit. Credit Utilization is the percentage of your total credit line that you’re using. Carrying high balances or maxing out your credit cards works against you. Set up an alert to notify you when your balance hits a certain threshold.  This may help you put the brakes on spending.
  • New transaction alerts
    Fraud can affect both your personal and business credit scores if someone steals your credit card or taps into a line of credit you’ve opened and runs up a balance. An easy way to help combat that is to set up an alert to let you know when a new debit or purchase transaction posts to your bank or credit card accounts.

Remember to Check Credit Regularly

Checking your own credit report won’t hurt your score.  So this is something you should do at least once per year, if not more often. Review your credit to look for things that alerts might miss — a new account opened in your name that you don’t recognize or a credit reporting error that might be hurting your score. If you spot an error, dispute it with the credit bureaus reporting the information. Doing so could get the information corrected or removed, giving your credit score a lift in the process.

Looking for other ways to improve your credit rating?  Check out these articles.


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