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What Is Heavy Equipment Financing?

by Simon Dreyfuss7 minutes / January 9, 2022

KEY TAKEAWAYS

Whether you’re in construction, agriculture, or another industry that requires large equipment to operate, heavy equipment financing can provide a valuable tool to procure essential machinery without depleting your working capital.
Heavy equipment financing, like all financing, has both pros and cons. While it can offer tax benefits and flexible payment terms, it’s crucial to consider potential downsides such as lengthy repayment schedules which can impact future borrowing.
Applying for heavy equipment financing is streamlined and straightforward process which typically requires minimal documentation.

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

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

What Is Heavy Equipment Financing?

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

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

Pros of Heavy Equipment Financing

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

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

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

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

Cons of Heavy Equipment Financing

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

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

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

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

How to Apply for a Heavy Equipment Financing

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

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

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

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

Maximizing the Benefits of Heavy Equipment Financing

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

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

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

Simon Dreyfuss

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How Businesses can Counter the Threat of Deepfakes

Operating Your Business

by Brandon Wyson6 minutes / December 29, 2021

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.

Brandon Wyson

Content Writer

Brandon Wyson is a professional writer, editor, and translator with more than nine years of experience across three continents. He became a full-time writer with Kapitus in 2021 after working as a local journalist for multiple publications in New York City and Boston. Before this, he worked as a translator for the Japanese entertainment industry. Today Brandon writes educational articles about small business interests.

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How to Survive Negative Cash Flow

Manage Your Money

by Vince Calio6 minutes / December 13, 2021

No matter how successful your small business is, you’re going to have periods in which sales may be down, customers may be slow to pay or orders aren’t getting fulfilled due to inventory problems, resulting in your monthly expenses being greater than your monthly revenue. These are just some of the scenarios that may lead to a negative cash flow.

If you are experiencing negative cash flow, how long can your business survive? Unfortunately, there isn’t a one-size-fits-all answer to this, because a negative cash flow may be the result of several factors.

Why are you in the Red?

The first question you need to answer is why exactly your business is in the red. Once you’ve identified the reason, you can consider different solutions to help you get back to being cash flow positive.

Some of the reasons your small business may be in the red include:

You’re waiting for invoices to be paid – You may have a strong accounts receivable portfolio, but that won’t do you much good until customers settle the bills that they owe you.
You have too much inventory – You may have over-anticipated demand for certain products and as a result, bought more inventory than you can afford.
Sales are slow – Your gross revenue may not be where you want it to be, perhaps due to supply shortages and the continued rippling effects of the COVID-19 pandemic.
You’re waiting to launch a new product – You may have invested heavily in the research and marketing for a new product or service that you haven’t begun to sell yet.
Your overhead/operating expenses are too high – Your overhead/operating expenses include payroll, rent and utility payments, internet access bills, etc. There may be areas in your overhead for which you are paying too much and need to reexamine.
You’re carrying too much debt – Financing is crucial to the growth of many small businesses and there are many lending options out there, but those regular installment payments of that debt may have gotten the best of you

Figure Out a Timeline

When your business is in the red, it’s going to be a stressful and time-sensitive situation. First, how long can you afford to stay there?

You can figure this out by using a very simple equation – take the amount you have in cash reserves and credit, and divide that by how much money you are losing every month. For example, if you owe $6,000 every month and you have a total of $60,000 in reserves, credit and borrowings from friends or family, then you can afford to operate for 10 more months.

If you have a bright spot on the horizon, such as a due date for a big invoice or the launch of a new product, then you may have multiple solutions available to you. Additionally, if you’re in the red because sales are slow, then you would have 10 months to figure out how to make your business profitable again by adjusting your prices or figuring out ways to cut overhead.

Re-examine Your Products/Prices

If you’re struggling with a negative cash flow because of weak sales, then you may have to take a hard look at the prices of your products or services It could be that your sales margin – the price of your product minus the cost of producing your product – may be too low, thus indicating a need to adjust the price of your product.

Perhaps you need to come up with a plan to reinvent your business. Think about the way you’re promoting your product or service and whether you are reaching the right market. For example, an expensive, gourmet restaurant probably won’t succeed in a middle- or low-income neighborhood no matter how good the food is. Does your product or service represent the same mismatch with the market you’re trying to sell to?

Perhaps you’re not sufficiently engaging your market with tools such as digital advertising or email marketing. It also could be that you aren’t advertising your products or services as well as you should be, be it on social media, through your website or otherwise on the internet. Are you targeting the correct market with the right product? If not, you may consider changing your products or services or marketing approach.

Reduce Overhead

Just like you need to be careful not to live above your means when it comes to your personal finances, you need to make sure your business expenses are not more than you can afford. Closely examine what you are spending money on every month and eliminate non-vital expenses.

For example, you may want to switch to another office if your rent is too high, or you may have to perform the unpleasant task of furloughing or letting go of employees to reduce costs. Hiring freelancers instead of full-time employees and cutting down on the amount of office supplies will also reduce operating costs.

Work With Creditors

If your business is carrying too much debt and the monthly payments are causing your business to experience a negative cash flow, then you should work with your creditors to reduce monthly payments.

If you are using outside vendors for services such as marketing, public relations or accounting services, you may want to put your relationships with them on hold for the time being.

Borrowing may be an Option

If your cash flow is negative because you need to pay your vendors or if customers are slow to pay their invoices, certain forms of business financing such as purchase order financing or invoice factoring may help you get to the end of that timeline. Both forms of financing may put the funds in your hands, not add to your liabilities and keep you from going under.

If your company has a history of strong revenue streams but is currently experiencing a negative cash flow because you’ve poured money into the research, development and marketing of a new product and you are waiting for the product to be launched, then revenue-based financing may be an option you want to consider.

Don’t Declare Bankruptcy Just Yet

Bankruptcy is a painful and legally complex solution that you should generally try to avoid. If you find yourself with a negative cash flow, don’t panic just yet, because it probably isn’t going to last forever. Closely examine the reasons your business is in the red and come up with solutions on how to fix them.

Be cost-efficient with your overhead expenses, rethink your products and prices and determine if there are financing solutions for you. Doing so can give your business a consistently strong cash flow moving forward and put it in a position to be more successful in the future.

Vince Calio

Content Writer

Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

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Can I Get Approved for the SBA 7(a) Loan Program

Manage Your Money

by Liz Froment7 minutes / December 11, 2021

Can I Get Approved for the 7a Loan Program

Any small business owner who spends time searching for small business loans–both through banks and online–has likely come across the SBA 7(a) loan program. It’s one of the more popular small business lending options out there. With that, many small business owners look to the Small Business Administration (SBA) to help with financing.

One way the SBA helps small business owners is through their Loan Guarantee Program. Here, you’ll learn what you need to know about the SBA 7(a) loan program and the requirements for approval.

What is the SBA loan program?

SBA loans don’t actually go through the government. Instead, the SBA offers guarantees to participating lenders, including traditional banks, credit unions, online lenders and private lenders.

The goal is to make small business loans less risky for these lenders. This means that more business owners can secure funding to help grow their businesses.

Guarantees typically cover anywhere from 50 to 85 percent of the total loan amount, depending on the loan. The SBA has a variety of loan options, including the 7(a) program, the 504 program, microloans and disaster loans.

However, the SBA 7(a) program is the focus here.

What is a 7a loan?

SBA 7(a) loans are some of the most popular options available for small business owners. In the 2019 fiscal year, over $23 billion in loans saw approval. An average loan was for just under $450,000.

The flexibility of the 7(a) loan program makes it popular among small business owners. 7(a) loans are guaranteed up to $5 million. For loans up to $150,000, the SBA guarantees 85 percent. The SBA guarantees 75 percent for loans over $150,000, up to $3.75 million on the $5 million maximum loan amount.

If you default, the SBA will pay out the guaranteed amount. It’s one way the administration removes some of the default risks from lenders. This allows them to offer more attractive repayment terms.

Many small business owners would likely struggle to secure financing from traditional financial institutions without the SBA Loan Guarantee Program.

What are the SBA 7a loan terms and interest rates?

SBA loan terms are set with the long-term goals of small business owners in mind. Repayment terms are often based on your particular financial situation. However, most of these are paid back via monthly installments.

The set terms are as follows:

Real estate: up to 25 years
Equipment: up to 10 years
Working capital and inventory: up to 10 years

Another benefit of an SBA loan is that it sets a maximum with lenders on interest rates. Base rates are tied to Prime Rates, benchmark interest rates and additional spread rates.

The spread rate varies depending on the loan amount and the term. Typically, higher loan amounts with shorter terms have slightly lower spread rates.

The SBA has specific spread rates they use. But, the rates can change as the market rates do over time.

Are there fees involved with the SBA 7(a) loan program?

While you typically won’t find origination, application and processing fees with SBA loans, there still are fees to consider.

These fees can include:

SBA loan guarantee fees (which vary depending on the size of the loan; but they only apply to the guaranteed amount)
Credit authorization fees
Packaging fees and closing costs
Appraisal fees for real estate related loans
Late payment penalties
Prepayment penalties which apply to loans longer than 15 years that are prepaid within the first three years

The guarantee fee is the highest of all associated SBA loan fees. Keep these fees in mind as you figure your total payment amount.

The basics of qualifying for SBA 7(a) loans

The SBA has several eligibility requirements you must meet to qualify for any of their loans, including the 7(a). Since these are popular loans, you should understand the different requirements before you apply.

First, your business must be for-profit and based within the United States or its territories. Also, the SBA has size standards they use to ensure that the definition of small business gets met–since it varies across industries. This standard is generally a combination of employee size and annual average receipts.

Second, the SBA wants you, as the small business owner, to have a stake too. So, they require that you invest your own time and money into your small business. Also, eligibility rules state that you need to have been in business for a sufficient amount of time, typically a few years.

Finally, your business must be eligible for a loan. Some are not including real estate investment firms, rare coin dealers, companies involved in speculative activities, and companies where gambling is the primary activity, among others.

What are the SBA 7(a) loan program requirements?

Your job isn’t over yet, even once your business is eligible for a loan application. You need to meet the loan requirements, too. The SBA requires you to submit information on your “personal background and character”. This includes criminal history (if any), your citizenship status, work history in the form of a resume, past addresses, and other items as well.

You also need to provide a business plan. A solidified business plan goes a long way towards showcasing the strength of your business and your plans for the future. Don’t forget to include detailed information on how you’ll use your loan.

Other documents required are your business financial statements. You need to show your revenue and profitability. The SBA typically approves businesses with at least $100,000 in revenue each year. You should also provide a listing of any debts and your debt schedule, which can help highlight your expected cash flow.

Your personal credit score is important. The SBA and lenders will typically look for a FICO credit score above 650.

Finally, there is some personal risk involved with 7(a) loans too. The SBA requires anyone who owns over 20 percent of the business signs a personal guarantee on the loan.

While each lender is different and requirements vary depending on your situation, keep these requirements in mind as you move through the process.

Types of loans in the 7(a) program

Within the 7(a) loan program, there are different loan options beyond the 7(a) standard loan you can explore.

The 7(a) Small Loan program has all the requirements of the standard 7(a) loan with one significant difference: it offers a maximum loan amount of $350,000.

SBA Express loans are designed with quick turnarounds in mind. They have a maximum loan limit of $350,000. Note that the SBA guarantees 50 percent of the loan amount.

SBA Export Express loans are directed at exporters for lines of credit up to $500,000. The SBA guarantees 90 percent for loans up to $350,000 and 75 percent for amounts beyond that. It’s yet another option with quick turnaround times.

An Export Working Capital loan is for a revolving line of credit up to $5 million with a 90 percent SBA guarantee. This loan often has short terms of up to 12 months.

International Trade loans are set to meet the long-term financing needs of export businesses. The maximum amount is for $5 million, with the SBA guaranteeing 90 percent of the loan.

How can you use a 7(a) loan?

The SBA sets guidelines for both the general loan terms and how funds get used.

These include:

Expansion and or renovation needs
New construction
Purchasing land or buildings
Purchasing equipment, fixtures, or lease-hold improvements
Working capital
Refinancing debt (the SBA cites it must be for “compelling reasons”)
Seasonal lines of credit
Inventory costs
Business startup costs

Understandably so, it’s essential to know this information before you apply. Otherwise, you could lose your funding if you’re using it for unapproved reasons.

The Bottom Line

It’s easy to see why SBA 7(a) loans are so popular with small business owners. They provide funding with flexibility and attractive terms. If you meet the qualifications and requirements for an SBA loan, it just could be what you and your small business need to achieve your long-term goals. To learn more about SBA loans, click here.

Liz Froment

Liz Froment has been freelance writing for five years. She covers topics such as retirement strategies, financial technology, finance, marketing technology, small business, insurance technology, insurance, commercial insurance, and real estate. Liz has written for clients including UBS, CB Insights, AT Kearney, Cake Insurance, Novidea, LoopNet Coldwell Banker, Zembula, and HotelCoupons, among others. Her ghostwritten work has been seen on Social Media Today, Entrepreneur, Search Engine Journal, and Proformative. Before freelancing, she worked in corporate finance focusing on mutual funds and hedge funds for companies such as State Street Corporation, KPMG, and International Investment Group. From there, she worked at Brown University in grants administration. Liz lives in Boston and has a Bachelors of Business Administration with a concentration in management from the University of Massachusetts at Amherst.

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The Benefits of Business Lines of Credit

Manage Your Money

by Vince Calio5 minutes / December 10, 2021

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

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

What is a Business Line of Credit?

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

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

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

Business Line of Credit vs. Business Credit Card

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

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

What are Each Used for?

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

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

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

What is a Secured vs. Unsecured Line of Credit?

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

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

How Do You Qualify for a Line of Credit?

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

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

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

Vince Calio

Content Writer

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How to Transfer Ownership in an Existing Business

Operating Your Business

by Brandon Wyson6 minutes / December 9, 2021

Two sit in foreground while one lurks in the background.

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.

Brandon Wyson

Content Writer

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The Cost of Opening a Dental Office

Industry Challenges

by Vince Calio8 minutes / November 1, 2021

Congratulations on successfully graduating dental school and earning your DDS or DMD. Statistics indicate that you are going to have a fulfilling and lucrative career, as US News and World Report’s 2021 Best Jobs Report lists being a dentist as the 9th best job in the country.

The American Dental Association estimates that 77% of dental practitioners own their own practice, and according to the Bureau of Labor Statistics, the average annual salary of a general dental practitioner is $180,830.

Before you set up shop, however, you’re going to have to learn about financing, administration and managing an office. You’re also going to need to become very cognizant about managing your own credit score. According to the ADA, starting a new dental office can cost between $350,000 to $550,000, depending on where you want to be located. Additionally, the cost of acquiring an existing dental practice can range from $500,000 to $750,000, according to Wells Fargo’s health care lending unit.

That, combined with the fact that you probably have student debt piled up, means you will have to take the necessary steps to line up financing if you’re looking to start a new practice or purchase an existing one.

Practice First

Before you think about starting out on your own, you may want to try to join a dental practice first. Doing so for a time will have many benefits when you seek to borrow money: it will allow you to establish your name as a dentist – something that a lender would look favorably upon. It will also give you a salary and allow you to start paying off your student debt (regular payments also help when seeking financing), and it will give you practical experience in the business side of running a dental office (i.e. like understanding the complexities of patient management and insurance).

Additionally, if you’re just starting out, practicing with another dental office gives you the opportunity to be mentored by more experienced dentists who can offer you career and business advice. You also need to become a member of the ADA – something that lending institutions often require when you’re seeking financing.

How Do You Assess Costs of a New Dental Practice?

Many new dentists may tend to overspend when starting a practice, so it’s important to itemize what you will need:

Choose a location. This may be the most important decision you make. Your location will largely determine the cost of leasing an office. Real estate in both urban and densely populated suburban areas will obviously be more expensive than a rural area, but you must also factor in your need for patients, so it’s important to heavily research the area in which you want to open shop. What is the location in which you are likely to get the most business for the cheapest office space? What is the competition in that area? Is this a neighborhood in which you want to live or perhaps raise a family?
Price out dental equipment. You’re obviously going to need a dental chair with a spit sink, which can cost up to $15,000, a dental x-ray machine which, according to the type of machine you buy, can cost up to $20,000, and other equipment. Like with any business, you want to find a supplier that you are comfortable negotiating with and that can accommodate your needs at the lowest possible price. Price out each item you will need.
Assess costs of office equipment and software. You’re going to need furniture such as desks, couches and tables for the waiting room, office chairs and most importantly, a computer system. You will also need electronic health records software specifically made for dentists, which range in cost. If you are planning to be a family dentist, you may need to consider turning part of your waiting area into a children’s play area complete with a variety of toys appropriate for kids of all ages.
Create a Website. Every small business needs an optimized website, including dental practices, because the internet is the first place people will turn to when looking for a dentist. Creating a website for your business may be a lengthy but worthwhile process.
Get dental malpractice insurance. Malpractice insurance for any medical practice, including dental offices, is required in almost every state.
Hire Personnel. You are also going to need:

An office manager to keep track of appointments, insurance issues and to greet patients, among other things. According to Salary.com, the median wage for a dental office manager is $37 per hour.
A dental hygienist to handle teeth cleanings, give patients information and help keep track of electronic health records. The average annual salary of a dental hygienist varies from state to state, according to ZipRecruiter. Washington state is the one in which dental hygienists make the most – the average annual salary is $84,957.
A dental assistant to prep patients, sterilize equipment, organize dental tools and assist during dental procedures. According to ZipRecruiter, the average annual salary for a dental assistant ranges from $35,000 to $40,000 per year, depending on which state you are practicing in.
An attorney to assist you with establishing your business as a limited liability company (LLC) or other type of establishment and to obtain business licenses in your particular state and community.
Outside vendors to assist you with tasks that you may not be an expert in, including marketing and public relations, IT and optimizing your website.
A financial consultant to give you advice on how to stay invested in your business and manage your money. Believe it or not, there are actually advisors out there that specialize in working with dental practices such as Dental Advisors.

Create a Business Plan

Like any other small business, in order to get financing, you’re going to need a business plan. You many want to get expert advice on how to create a plan, but these plans generally include:

An executive summary of your business and description on why you believe your practice will be successful.
A brief description of your services, be it a family practice or a dental office that specializes in root canals or other types of oral surgery.
A summary of your practice’s management structure. This is especially important if you are opening a new dental office with another dentist.
An analysis of your competition and marketing strategy. This is a brief description of who you will be competing with in your area and how you plan to attract new patients, and
A financial plan. This is the most important element of your business plan when you go to seek financing, and you may want to consider consulting with an accountant on this. The financial plan will give cash flow estimates; your personal financial information and a detailed description on how you will spend your startup money, among other things.

Getting Financing

Seeing the total cost of starting a dental practice may hurt more than a root canal, but you do have plenty of options for financing. Plus, you have a unique advantage in that most dental practices usually end up being lucrative, and therefore, lending institutions tend to look favorably on them.

Many banks actually have lending programs specifically tailored to funding new dental offices, including Bank of America and Wells Fargo. This is different than with most small businesses that often need years in business and a strong cash flow history in order to secure a loan.

Practice loans often range from five to 12 years, and the rate depends on a number of factors, such as your personal credit score, location, and business plan.

While lending institutions are often eager to finance dental practices, however, getting financing isn’t guaranteed. In addition to a strong business plan, banks will look favorably upon you if you have some experience as a practicing dentist.

They want to see a strong personal credit score, so it’s important to make sure that you are up to date on student loan payments, car or mortgage payments and other bills, and have a strong payment history for any revolving credit cards you may have. If your student debt is overwhelming, you may even consider refinancing it to a lower monthly payment.

Remember – You’re not Just a Dentist!

Like any other doctor or medical specialist, as a dentist your first priority will always be taking care of your patients – as it should be. However, it is important to remember that your job isn’t just filling in cavities and performing root canals. If you are looking to open your own practice, your business savvy is just as important as your dentistry skills, and combining both will allow your practice to thrive.

Vince Calio

Content Writer

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What is a Working Capital Cycle

Manage Your Money

by Brandon Wyson7 minutes / September 3, 2021

The Key Details of the Working Capital Cycle

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

Elements of a Working Capital Cycle

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

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

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

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

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

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

Positive Working Capital Cycle

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

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

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

Negative Working Capital Cycle

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

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

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

Improving Working Capital with Tactical Financing

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

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

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

Shortening Your Working Capital Cycle

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

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

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

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

Final Considerations and the Nature of the Working Capital Cycle

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

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

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

Brandon Wyson

Content Writer

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Tips on Starting, Funding a New Business

Operating Your Business

by Vince Calio11 minutes / August 20, 2021

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

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

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

Mapping Out Your Business

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

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

Source: Growthink

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

Executive Summary

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

Business Description

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

Marketing Strategy

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

Competitive Analysis

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

Design and Development Plan

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

Operations and Management Plan

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

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

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

Business Basics

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

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

Sales Margin

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

Customer Acquisition Cost

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

Customer Retention Rate

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

Customer Conversion Rate

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

Revenue Percentages

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

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

Build a Website

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

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

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

Potential Funding Sources

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

Angel Investors

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

Source: Angel List

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

Crowdfunding

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

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

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

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

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

Grants

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

Small Business Credit Cards

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

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

Venture Capital

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

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

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

Vince Calio

Content Writer

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How Body Shops Can Increase Profit Margins

Industry Challenges

by Brandon Wyson6 minutes / August 12, 2021

KEY TAKEAWAYS

Body shops can improve efficiency and customer satisfaction by embracing digital services and software solutions, such as digital multi-point inspections and management software, ultimately contributing to increased profit margins.
To maximize profit margins, Body shops should optimize labor costs by investing In experienced and efficient staff, offering competitive pay rates, and providing hands-on training to enhance productivity.
High customer retention is essential for body shops. Implement clear communication flows, referral incentives, and proactive scheduling of regular services like oil changes to keep existing body shop clients returning.

Body shops and the commercial auto repair industry at large pull in billions annually but often run with staggering operational costs from labor, parts, and general overhead. A body shop’s ability to keep revenue up is a means of survival but healthy profit margins are the basis of growth. To run a successful body shop, owners must keep a close eye on the several dozen avenues in which money both comes in and out of their shop. This article is a collection of tactics for body shop owners to maximize their profit margins without sacrificing quality and service.

How to Take Labor Margins and Staff Management into Account

While parts and facility costs will affect a body shop’s profit margins, staff and labor costs are just as important — if not more so. Having high-quality and efficient staff is the most concrete way to increase profit margins as experienced mechanics and technicians are likely to complete jobs faster and with fewer errors. Be certain that your shop’s pay rates are competitive and attractive to experienced workers and reassess your shop’s training structure to be more hands-on. Find out if your state offers subsidized training for auto workers as you may be able to send your staff for specialized training at a reduced cost; some vendors and suppliers are known to offer similar services. Get a general idea how long common procedures like coolant flushes or even more intensive repairs take your staff and use that information to price your services.

Instead of focusing on products and parts, remember that the knowledgeability and skill level of your staff is the basis of a good repair. According to Body Shop Business, labor profit margins for body shops often range between 50% and 65% while margins on parts go from 20% to 28%. Investing in good labor and maintaining a happy, productive staff is one of the best ways to put a body shop in the direction of better profit margins.

Improve Your Retention Rate

A trend report on customer retention from Invesp found that while businesses have about a 20% chance of pulling in a new customer, they have a 60% to 70% chance of bringing back a repeat customer. This is especially true for body shops as vehicle owners should never be a one-time sale. Cars require regular maintenance, so body shops ought to be certain they are homing in on customers that are already in their shop just as much as potential new sales. There are several key strategies to keeping your current customers engaged and willing to return for future services.

Candid and Clear Communication – Be certain that your staff regularly communicates with clients during a job. Make sure that your shop’s training and onboarding procedures are specific about keeping customers in the loop and being transparent about all steps in a repair. It’s also important to continually assess your upselling practices – making sure not to upsell them unnecessarily. Defeat the long-standing myth that independent body shops nickel-and-dime their customers by being candid and explaining why each step of a procedure is necessary.

Testimonials and Referral Incentives – Your existing customers have the potential to be your body shop’s best advocate and marketing tool. Consider offering discounts on basic services like oil changes or coolant flushes in exchange for customer referrals.

As your shop grows, it pays to be on top of your online reviews and to establish processes that help you solicit and respond to them. Consider asking customers to leave a positive review after a successful visit.

Remember that not all reviews are going to be a ringing endorsement for your company, so be certain to directly address bad reviews. Whether good or bad, give personalized responses to reviews as often as possible. Part of the appeal locally run body shops enjoy comes from the personal touches that can be brought to a customer experience. Overall, make sure that your shop’s personality shines through in your online presence just as well as it does in your physical shop.

Plan Future Appointments for Regular Services – While many body shop visits are specifically problem-based, services like oil changes can and should be scheduled in advance so customers keep your shop in mind when it is time for regular servicing to their vehicle. Capitalize on necessary procedures like annual inspections stickers and coolant flushes to keep regular customers as regular as possible.

Digital Services and Software Solutions

Body shops have modernized in parallel with the vehicles they repair. As car companies continue to integrate increasingly complex computer systems and unique parts into vehicles, body shops have shown continued resiliency in their ability to keep up with consumer expectations. Another consumer expectation that body shops met in stride was the demand for digital services during the COVID-19 pandemic. Digital multi-point inspections and procedures are a win-win for consumers and body shops alike as consumers can clearly see their vehicle’s condition and body shops can more meaningfully demonstrate what repairs are necessary or not urgent.

There are several companies that offer digital interfaces for multi-point inspections; one of the most well-known is Bolt On Technology whose digital inspection program allows easy photo integration and tablet use for technicians and mechanics. Compared to traditional paper inspection forms, digital interfaces provide numerous time-saving benefits for your mechanics while giving customers a streamlined look at their vehicle’s servicing needs.

Another software solution that body shops looking to tighten their bottom line may want to consider is management software like ProfitBoost, which allows shop managers and bookkeepers to consolidate parts and labor expenditure figures into an easy-to-read single platform. ProfitBoost gives shops the ability to quickly assess their spending and determine where they can expand or retract to help their bottom line.

Profit Margin Overview and Final Considerations

With overhead and parts costs as a constant necessity, it is a relentless balancing act for even the most successful body shops to keep their heads above water. There is no gimmick or guaranteed trick to increase a shop’s profit margin, but a valuable first step is making sure that your shop offers personalized and professional services at the highest caliber possible. When you make business decisions around this primary goal, you can expect profits to follow.

Brandon Wyson

Content Writer

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