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How Businesses can Counter the Threat of Deepfakes
The Internet age united the world with a universal language of twitters and pings. The benefits of our new interconnected society are too plentiful to count, but there is also a decrepit underworld of cybercriminals and cybervandals who use that interconnectedness to spread misinformation. Cyber criminals thrive in anonymity and often take their greatest pride when robbing people of their own. As the Internet becomes more intertwined with our way of life, it is becoming clear that digital attacks on a person’s character can be just as damaging as those done in the real world. Deepfakes are near-perfect digital recreations of faces, often manipulated into compromising positions or saying words the speaker never actually said. This type of mimicking technology has become increasingly convincing since its relatively recent inception. As a result, it is imperative that people and businesses targeted by deepfakes immediately act. Misinformation at the expense of your business can be costly and reputation-shattering if not properly quelled.
Types of Deepfakes and Preventions
The most popular deepfakes often put words in the mouth of celebrities or politicians, but those aren’t nearly as malicious or dangerous as fakes that target businesses. While celebrities have massive platforms to dismantle the slings and arrows of outrageous cyber ruffians, small businesses have to fight much harder to recover.
Social Engineering
Advanced deepfakes can mimic voices well enough that there are several documented cases of employees, or even executives, being fooled into sharing private information with cybercriminals. These types of fakes tend to happen over phone calls and don’t need the sophisticated face-replicating tech. These attacks are called social engineering which is an umbrella term for any kind of manipulation done to gain personal or sensitive information. Social engineering deepfakes take advantage of peoples’ inherent willingness to trust caller ID and the voices of people they know.
Preventions: Social engineering deepfake attacks are so successful because most people don’t expect them. Since social engineering attacks target employees or anyone who may hold sensitive information like passwords or routing numbers, the most effective way to snuff out these attacks is training. Teach your employees the telltale signs of social engineering: brief calls asking very specifically for those passwords or routing numbers.
Another tactic is to develop a failsafe or codeword system for private company information. Make a system where at least two employees must approve the sharing of private passwords or sensitive information. Social engineering attacks thrive on off-the-cuff conversation. If the target of a social engineering attack brings another employee into the conversation, it’s likely someone will realize something about the caller is off.
Viral Misinformation
Being that deepfakes are near-perfect imitations, those who may want to do your business harm or have a bit of fun at your expense may use your image or the image of someone close to your business to spread misinformation. This misinformation can come in the form of doctored video or audio clips posted to social media with the intent to harm your business’s reputation.
Preventions: While it is impossible to prevent cyber hooligans from creating deepfakes, it should be every business’s prerogative to create a quick-acting crisis response plan. Every second is precious when countering misinformation; it’s very common for the initial misinformation to overshadow delayed corrections from businesses. The objective of these deepfakes, beyond general chaos, is to sway public opinion. Sway favor back into your court by aggressively and poignantly dismantling the authenticity of the deepfake video or audio.
If the deepfake is a video impersonating one of your employees, make sure that employee is involved with these efforts. Tail the doctored video or audio relentlessly and post in its comments or adjacent pages proof of its falsehood, whether that be your own video debunking their claims or a written response. While deepfakes are near-perfect, the uncanny valley is still present: look for breaks in lighting or odd pixilation on or around the face. These little signs are common on cheaper deepfakes and can be their easy undoing in your business’s response.
Extortion
The most devious cyber hooligans may turn criminal and use their deepfake tools for criminal extortion of your business. Deepfake extortion generally entails cyber criminals creating a doctored video of a public figure, in this case, someone important to your business. Then, the cyber criminal will often send the video to you, the business, asking for ransom. If you don’t give in to their demands, they will post the video, often pornographic or displaying absurd violence, to the Internet.
Preventions and Containment: Giving into the criminal’s demands is not an option. Collapsing before extortion is especially dangerous, as it will likely mark your business as an easy target for future cyber criminals. First, notify the police. Extortion is a crime, and in several states, malicious deepfakes are too. As for protecting your business’s brand and image, be as transparent as possible about the nature of the extortion. Act quickly and develop a public statement about the deepfake extortion before the cyber criminal posts it if possible. Beating the post will do a major hit to its credibility.
If the salacious video ever goes live, address it directly. Ignoring the deepfake, however heinous, will only go to damage your business, as consumers who see the deepfake but don’t hear an adequate rebuttal from your business may believe that either you aren’t aware of it, or even worse: that it’s real.
Technology’s Climb and Integrity’s Tumble
The AI technology that manufactures deepfakes is strengthening every day. There is absolutely nothing we, or anyone, can do to slow their development, so it ought to be the prerogative of every business to learn the warning signs and develop a clear plan of response. Safeguards like multiple employee sign offs for money transfers or password releases is a good measure to implement already, but it can be equally critical to your company’s deepfake defense.
Beyond these steps, there is unfortunately little businesses can do to meaningfully prevent deepfake attacks. As time moves on, however, and deepfakes become even more common, we may see a silver lining. People will hopefully learn to ask themselves when watching something wildly out of character or too good to be true “is this a deepfake?” And at that point, businesses may be fighting less of an uphill battle when responding to defamatory deepfakes.
How to Transfer Ownership in an Existing Business
While small business owners are well known for their attention to detail when crafting their initial business plans, almost no business is built with plans for transferring ownership. While the steps to building a strong business are often intuitive to an owner, transferring that ownership to new custodians isn’t nearly as cut-and-dry. No matter if for retirement or new horizons, transferring your business must be handled as deftly as when it was first acquired or created. There are several nuances to business ownership transfer that may not be immediately apparent even to the savviest business owner; but if missed, this could spell catastrophe later. The most effective transfers are seamless and well-managed. Follow this guide to learn the types of business transfers and the steps between first meetings and passing on the keys.
Types of Business Transfers
Outright Sale
An outright sale is as simple as business transfers can be. An outright sale means that an interested party and a business owner make an agreement to fully transfer ownership of the business after a signed agreement and often an exchange of capital or stock. Importantly, outright sales traditionally mean that the former business owner then has absolutely no influence on the future of the business; for this reason, outright sales are often a great choice for retirees or underperforming businesses of which the owners would like to wash their hands.
Gradual Sale
A gradual sale is a financing agreement between a business owner and an interested party where daily operations of the business in question are transferred over to the new party while the owner receives some income from their former business for a predetermined amount of time. Gradual sales agreements often have far less capital or stock exchange on the actual day of sale but tend to pay out more to the former owner than lump sums from outright sales. Gradual sales are great options for would-be buyers who don’t have the liquid for an outright sale but see promise in the business they are acquiring.
Lease Agreement
In business lease agreements, the former business owner still owns their business while the signing party runs day to day operations and makes regular payments to that owner. Lease agreements are great for business owners that cannot run daily operations but aren’t certain if they want to sell their business outright. Unlike a gradual sale which ends with the original owner no longer owning the business, that isn’t necessarily the case with lease agreements. Depending on the terms of a lease agreement, former owners may petition to reinstate their ownership if they are unhappy with the new custodians.
Transfer by Bequest or Gift
Business owners can name someone to receive their business in their will or before they die as a gift. For businesses transferred by bequest, all business assets beyond $5 million are subject to tax. There are tax implications with transfers and bequests – and the Biden administration is aiming for significant changes to exemption limits and tax rates so be sure to fully research and understand the tax consequences of passing along your business as a gift.
Transfer Checklist
Consult an Attorney
Before talking numbers with any potential buyers, or moving forward with gifting your business, it is highly recommended that business owners talk to an attorney regarding their succession plan. A company transfer is as much a legal process as a business process. Attorneys are acutely aware of regulatory requirements for business transfers (which can vary wildly between states) and can be a lifesaver when drafting your agreements.
Seek a Business Valuation
Seek out a 3rd party valuation firm before talking to any buyers. Even if you do not go through with a sale, having a relevant valuation of your business can be supremely helpful for future financing or structure changes.
Beyond the valuation itself, be sure to consider the full extent of your business’s “Goodwill” which includes the value of your assets, your current customer base, as well as your existing reputation. These figures ought to all be included when determining an asking price for your business.
Prepare Your Purchase Agreement
Your Purchase Agreement is a legally binding contract that includes all elements of your impending sale. It is essential that if you have not already spoken to an attorney that you do at this point. Be certain that your Purchase Agreement touches on these concepts:
Description of Your Business: It may sound superfluous, but superfluous-ness is unavoidable in legal documents. You must state in certain terms what your business wholly is. Your business includes its location, products or services rendered, management structure, target customers, distribution strategies, financial history, as well as certification that you have the legal authority to sell your business, i.e., notarized deed or articles of incorporation.
Details of the Sale: This section will specify if the business transfer is via outright sale, gradual sale, lease, or potentially gift or bequest. Beyond the basic terms of the sale, this section should also list in concrete terms exactly what assets, like machinery, real estate, and staff, will be transferred in addition to the business itself.
Covenants: Depending on the type of agreement you strike with potential buyers, you, the business owner, may be responsible for certain financial obligations like existing loans, outstanding tax requirements, or any employee-related financial duties like benefits or salaries. Covenants also include any non-compete clauses, non-disclosure agreements, or indemnification agreements made alongside your transfer.
Inform Vendors, Customers, Employees, and the IRS
It is a well-respected professional courtesy to notify all of your contacting businesses and even customers about your impending change of ownership. While it is simply a kind gesture of thanks to your former customers and welcoming the new ownership, contacting vendors and suppliers is likely more important, as existing contracts will need to be amended to reflect your business’s new ownership.
It is essential, however, that you fully brief your employees and the IRS about your business transfer. Any existing contracts with vendors or suppliers will very likely need to be amended because of your business’s new ownership, so be certain to send electronic or postal notices to those relevant businesses before you finalize the transfer. As for the IRS, be certain your EIN (Employee Identification Number) is properly terminated at the time of your business transfer. Even if the new owners plan to keep the name of your business the same, they must apply for a new one or use their existing EIN to operate.
Saying Goodbye to Your Business
Regardless of the reason for your exit, transferring ownership of your business is a monumental step, often signifying a new life chapter. Like the owners who run them, every business transfer is unique. While this general guide tunes into the key, universal steps in the transfer process, almost every industry has their own caveats. When wading your way through regulatory legalese, it never hurts to have an extra set of eyes overlooking your transfer. Keep trusted employees and close mentors in the loop of your transfer and you are much more likely to walk away with a satisfactory contract and deal.
Tips on Starting, Funding a New Business
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:
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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.
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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.
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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.
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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?
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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.
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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:
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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.
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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.
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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.
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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.
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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:
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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.
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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.
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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.
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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.
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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.
Small Business Acquisitions and How to Finance Them
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:
- Why you want to make an acquisition;
- What type of company you are seeking to purchase;
- The location of the company in which you wish to purchase;
- The feasibility of merging your company’s balance sheet with the acquired company;
- The value of similar businesses in your industry and in your geographic location;
- A realistic amount you wish to spend on an acquisition;
- The logistics of merging your company with another, and
- 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.
Life-Saving Measures for Small Businesses on the Brink of Closure
No matter what part of the country you’re in, you have small business-owning neighbors struggling to keep the lights on. With erratic reopening plans, caseloads that still won’t decline, and the need for social distancing until there’s a widely-available vaccine, countless businesses have been hit hard. But what can be done? Are there any life-saving measures for small businesses on the brink of closure?
If you’re a business owner in this situation, you could find enough relief to keep your doors open and critical staff employed using one (or all) of the options below.
Review Your Expenses
While you might have already done this back in March, it might be time to review your expenses again.
Instead of eyeing luxury expenses this time around, put an eye toward ways to discontinue some low-margin services and supplies until traffic gets back to pre-pandemic levels again. This could mean paring-down your menu, hiring a delivery person instead of subcontracting to meal delivery services, liquidating inventory at a deep discount to reduce warehouse space, or even limiting workdays to the most profitable days and hours.
When evaluating expenses to cut, don’t think of these expenses as permanently on the chopping block. Instead, you can bring them back and build back up when life and revenue pick up speed once again.
Get Creative With Payment Arrangements
If you’re strapped for cash, your vendors may be as well. Reach out to your accounts payable and start a conversation about mutually-beneficial payment arrangements.
For example, if you can promise $X toward your invoice every two weeks, that’s better for your vendor than zero dollars. Your vendor gets a predictable cash flow, and you get a reasonable payment arrangement.
If you and a vendor do mutual business (they invoice you and you invoice them), set up a call for an invoice review. Explore creative options like applying their invoice for $1000 to your invoice for $800. You’ll still owe them $200, but it’s a lot better than $1000. This is a simple solution that often slips through the cracks because your AP and AR systems might not communicate with one another.
Explore SBA Loan Options
While the Paycheck Protection Program is no longer offered, there are three other SBA loan options you can explore for a much-needed cash infusion:
- Economic Injury Disaster Loan (EIDL): If you’re experiencing a loss of revenue due to COVID-19, you could be eligible. Terms are 3.75% interest (fixed) for up to 30 years with no pre-payment penalty. You can even defer payments for up to one year (but interest will still accrue).
- SBA Express Bridge Loan: If you have an existing relationship with an SBA lender, you may qualify for a loan up to $25,000. These loans can be regular term loans or bridge the gap between today and approval for your EIDL Loan. You just need to reach out to your existing SBA lender to inquire.
- SBA Debt Relief: If you have an existing SBA loan and have trouble making payments due to COVID-related financial hardship, this program can bring you relief. Eligible loans include “7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020″ per the SBA. If you qualify, the SBA will pay any principal, interest, and fees on your loan for six months.
Have a Candid Conversation with Your Bank
Finally, it could pay to sit down and have a candid conversation with your bank. Your bank doesn’t want to lose your business or see you default on lines of credit or other loans. You could find they’re willing to work with you if they know your full financial picture.
There aren’t any guarantees that your bank could come through with funds or reprieves from payments due. But, if you don’t start the conversation, you’ll never know what’s possible.
Have any other tips or advice on life-saving measures for small businesses? Let us know.
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.
How to Stress Test Your Small Business
In the banking world, advisors often talk about stress-testing portfolios — determining the effect of different scenarios on an individual’s or business’s holdings. The same should be done for a small business.
How prepared are you if the economy changes, and you need to dip into your reserves? How will you manage your cash flow? Do you, as a small business, have the resources to survive heavy losses if the worst-case scenario happens?
Here are six ways to help stress-test your business if there is a downturn in the economy.
1. Solicit advice from key advisors.
Do you have an advisory board or a brain trust of reliable partners? SCORE, a nonprofit that is a resource partner of the U.S. Small Business Administration, offers a network of volunteers including retired C-suite executives, who can help mentor.
Find your local chapter, which is typically done on a county by county basis, and attend a workshop or listen to a live or recorded webinar.
You can search for a SCORE mentor online or have the local chapter pair you with an expert who can help mentor you on your business goals. Some mentors bring in additional mentors to help with various aspects of your business, such as preparing for a potential downturn.
2. Create a plan for worst-case scenarios.
One of the more effective ways to prepare for a sluggish economy is to forecast trends. Look at what a dramatic drop in sales or a dramatic uptick in expenses might do to your business. Ask yourself what would happen if you lost a major vendor, product or service. What might this loss do to your company? Then decide where you could trim expenses, potentially increase profits or diversify your client-base.
3. Identify all your best customers.
Not all customers are created equally. That’s because some are more profitable than others. Once you’ve pinpointed who your best customers are, begin nurturing those relationships by continually adding value for them. Build brand loyalty for them by making sure it’s easy for them to do businesses with you. If a change in the economy affects your business, loyal, high-value customers may help sustain you until the market changes.
4. Review your financial cushioning.
Although the general recommendation for businesses has been six months, Hal Shelton, a SCORE mentor and angel investor says to look at how much you cash you need. Ask yourself these key questions:
- How much cash have you been using?
Look at your “net burn rate,” the rate at which you spend your cash holdings. For example, if you are bringing in $10,000 but you are spending $4,000 in expenses, your net burn rate is $6,000
- How much cash do you plan on using in the next 12-to-15 months?
Be conservative, but look at your monthly budget or the financial forecast in your business plan. Separately, look at actual cash expenditures as well as the cash in (sales) and cash out (expenditures).
- What stage is your business?
If you’re a start-up, or ramping up your business and going to have big expenditures, that’s different than being in the middle of a more-established place.
- How long will it take you to get more cash?
For many businesses, this is an unknown factor. Getting a loan from a bank, if they are willing to lend, can take several months. It usually takes at least a month to find a bank who might be willing to lend money and another month to fill out the paperwork. That’s contingent on already having a bank-ready business plan and an already established relationship.Shelton says pitching and presenting to potential angel investors takes significantly longer, usually at least six months or possibly nine months to a year.
5. Consider your borrowing options.
You don’t want to have to borrow money when you desperately need it. You want to borrow money before you anticipate you might need it, or at least have a good enough financial footing to be able to secure a line of credit or a business loan. Stephen L. Nelson a CPA in Redmond, Washington, offers some tips on how to forecast 12 months out using excel workbooks.
Shelton’s advice is to “Seek cash when you are in a position to explore options and negotiate from strength.” Then ask yourself: Can you still operate if your funding disappears?
6. Consider alternative funding options.
Besides traditional term loans, you may consider opening a business credit card or a business line of credit. There’s also equipment financing and grants for small business owners. If you have less than perfect credit or if you need money quickly as a business owner, a short-term loan may you be your best option.
By stress-testing your business’s finances and proactively planning now, you may help mitigate potential problems down the line.
Which Bank Is Best for Your Small Business?
As a small business owner, there’s a seemingly endless list of things to worry about, but banking shouldn’t be one of them. Your bank should offer the tools, resources, capabilities and service that are most essential to your business success.
But, what’s the best bank for small business?
Many business owners feel neglected by their bank, according to the J.D. Power 2017 U.S. Small Business Banking Satisfaction Study. If you’re a business owner or CFO who’s considering a banking switch, this guide may help you find your ideal banking match.
How to Find the Best Bank for Small Business
Finding the right bank for your business starts with doing your homework. Here are some of the most important things to consider as you compare banks:
Products and services: A checking account and a savings account are the two most basic financial tools you may need, but in searching for the best bank for small business, it’s important to look beyond that. For instance, you may need help with payroll services, payment processing or inventory management. Wealth management services, cyber security products and services or key person insurance may also be on the list of solutions you need your bank to provide.
Digital banking: Tech is increasingly important among small to medium enterprises, particularly where banking is concerned. Sixty-eight percent of small business bank customers’ interactions are either online or mobile. As you evaluate banks, pay close attention to online and mobile banking capabilities to ensure that you have the access, features and functionality you need to manage your business accounts on the go.
Financing options: You may not be seeking financing for your business right now, but don’t overlook what a bank offers in the way of financing options. Check to see if the bank offers business credit cards, business lines of credit and business loans. Take a look at what’s required to qualify for a loan or line of credit in terms of annual revenue and business longevity. Finally, consider the costs of borrowing with a particular bank. Hone in on the APR for credit cards, loans or lines of credit, as well as origination fees, annual fees and late fees.
Customized advice: Every business owner’s situation is different and there may be specific financial issues that you need guidance on more than others. The bank you choose should be able to offer the type of personalized advice you need most, when you need it.
Deposit account fees: Banking fees can take a significant bite out of your bottom line. In Nav’s 2018 Business Banking Study, 17% of business owners said they chose their current bank because it was least expensive. The biggest fee to watch out for is usually the monthly maintenance fee for checking, savings and money market accounts. Some banks allow you to offset or avoid this fee by maintaining a minimum balance or reaching a certain transaction volume each month, but not all do. Other fees to be aware of include cash deposit processing fees, wire transfer fees, fees for certified or cashier’s checks, overdraft fees, and returned deposit fees.
Deposit account APY: If you’re considering an interest-bearing checking account, savings account or money market account for your business, you want to make sure you’re getting the best rate possible on your balances. Compare the annual percentage yield (APY) for different interest-bearing accounts to see which banks have the most tempting offers. Remember, however, to weigh the interest you could earn on your balances to the fees you may have to pay to maintain your account.
Special incentives: Some banks sweeten the deal for business banking customers by offering special perks or incentives, such as a cash bonus for opening an account or a rewards program that’s linked to your checking account’s debit card. Still others offer discounted rates on financing options, free safe deposit boxes or waived fees on certain services. These extras may be secondary to some of the other criteria mentioned so far but it’s worth looking into see what a particular bank offers.
Convenience and access: If you’re busy running a business, you don’t have time for obstacles when it comes to accessing your accounts. As you scout out banks, consider how many branch and ATM locations there are, and how easily accessible they are to you. Think also about customer service availability. Smaller banks may only offer assistance by phone or email during regular business hours, while larger banks may be available 24/7.
Ease of transitioning accounts over to a new bank: Making the move to a new bank should be a smooth as possible so you’re not wasting valuable time. Some banks offer a switch kit to help you move your accounts over in a streamlined way. That’s something you may want to take advantage of if you want to minimize headaches with transferring accounts.
Reputation and personality: Finally, consider the bank’s reputation and the overall vibe it exudes. A bank that has a track record of engaging in questionable business practices or a reputation for being standoffish to its business clients is one you may want to avoid.
The Best Bank for Small Business Isn’t One Size Fits All
What your business needs from a bank may be entirely different from what another business owner is looking for. Determining which bank is best for you requires an understanding of what your business desires most in a banking relationship. If you’re not sure what that is, think about what’s lacking with your current bank. Then, use that as a guideline to evaluate how different banks may be able to fill in the gaps.
How to Handle Orders without the Danger of Too Much Inventory
You need inventory to fill orders, so having plenty of everything on hand might seem smart. There would never be a stockout and closing sales would be as easy as sending someone to the warehouse. But maintaining too much inventory may undermine your business.
Holding considerable inventory can force you to hold more product than is necessary. What you might consider, instead, is only stocking the amount of merchandise you need, and the inventory turns ratio (ITR) can help you find the inventory levels for your business.
Availability is good, but has a cost
High availability means buying, carrying, and storing a lot of product. Inventory costs money, so you end up using capital that could otherwise help grow and sustain the company. Too much money in inventory can also affect your need to finance and how much you might need.
And there are other problems: Inventory ages, not only on the books, but on the shelves. You may have products fall out of support, become discontinued, get damaged, or otherwise lose value. Then there’s the cost of storage space and increased headcount to manage the additional product.
This all adds up to money your business will have to spend on maintaining a constantly full inventory level.
Increasing inventory turns
Instead of more inventory, consider replenishing stock more frequently. So long as there are enough products on the shelf to satisfy orders that will come in until the next delivery, you can keep customers happy and reduce costs.
This is why you need to look at the ITR. ITR shows how frequently you replace stock over a given period – such as each month, each quarter or each year.
Calculate inventory turns by dividing the cost of goods for the sales you make in a period by the value of your average inventory over the same period.
The idea is to push inventory turns as high as you can to make better use of that inventory.
Setting the right turns level
Finding the right ITR can be a challenge. If you drive turns too high, you may miss filling orders in a timely basis because you don’t have the products you need. Too low, and it means cash is locked up.
Balance inventory turns with sales, vendor stock availability, supplier reliability, and minimum order sizes. Sales fluctuations like seasonality or outsized importance of certain products can also make it tougher to monitor and control ITR. Arrival of new stock in a timely manner becomes more critical.
There is no magic way to know what ITR will be right for your company, but understanding how ITRs work may help you test stock levels and optimize for your operations.