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Credit & Lending

7 Posts authored by: Inc.

Inc-Article-Logo.gifFor small business owners, strong personal credit is essential to obtaining business credit, so keep tabs on your credit score and clean up any errors

 

Most consumers know that their ability to borrow money is heavily influenced by their credit score, but maintaining a high score (and staying abreast of changes in how scores are determined) is even more critical for entrepreneurs, who often don’t know that their ability to borrow for their business is linked directly to their personal credit. While credit scores can seem like a black box, there are steps that business owners can take to monitor and potentially improve their credit scores.

 

“Credit scores are a dynamic interpretation of several conditions around consumers’ performance and access to credit, and those are subject to change and adjustment at the whim of FICO,” says Charles Green, managing director of the Small Business Finance Institute and author of Banker’s Guide to New Small Business Finance (Wiley Finance, 2014).

 

A prime example is FICO’s launch of FICO Score 9 in 2014, a revised formula that excluded medical debt. Entrepreneurs with outstanding medical bills could see their credit scores rise by 25 points under this new formula, which could make their applications for business loans more credit-worthy.

 

Credit scores depend on a number of factors, including a consumer’s past record of payment, how much of available credit a consumer uses and borrowing patterns, Green says. Borrowing patterns include how many credit applications you file in a given period and are weighed based on how many applications are made in a specific period of time.

 

It’s also important to understand how the various factors that tie into a credit score are weighed. For example, FICO weighs revolving credit such as credit cards more heavily than term loans such as mortgages, car loans, and student loans in their scoring methodology, according to Green.

 

Because growing businesses often struggle to maintain predictable (and sufficient) cash flow, it can be extremely advantageous to maintain a high credit score so that business credit can be accessed at favorable terms when needed. Toward that end, Green notes that the bottom line in maintaining a clean credit report and high credit score involves:

 

  • Monitoring your credit report regularly by requesting a free copy annually from all three major sources (Equifax, Experian, and TransUnion), and obtain an additional copy just before applying for any type of credit, especially business credit.
  • Fixing any mistakes by reporting them in writing to the credit bureaus, who must then investigate the issue and confirm the erroneous information with the source.
  • Making all credit card, mortgage, and loan payments on time.
  • Moderating your borrowing and maintaining lower balances on revolving credit accounts.

 

  • Employing a strategic approach toward credit card use, including how many cards you have and closing out unused cards properly. (Keep a hard-copy of correspondence with credit card issuers verifying that the account had a zero balance and was in good standing at the time it was closed.)

 

By maintaining a clean personal credit report and monitoring that report regularly, you’ll ensure that you have the highest personal credit score possible, which can prove to be one of your business’s most precious assets.



 

Bank of America, N.A. engages with Inc. to provide informational materials for your discussion or review purposes only. Inc. is a registered trademark, used pursuant to license. The third parties within articles are used under license from Inc.. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.

 

©2015 Bank of America Corporation

Inc.

How to Assess New Lending Sources

Posted by Inc. Sep 24, 2015

Inc-Article-Logo.gifAs the universe of available financing options expands, small business owners need to do their homework.

 

At the peak of the Great recession many small business owners worried that they had no lending options at all. How things change. Today not only are traditional lenders ready to provide financing, but so too are a wide variety of nontraditional sources.

 

But all those choices don't necessarily make borrowing easier. To make the smartest choice for your company you'll need to invest some time in assessing the pros and cons of each option before signing on the dotted line.

 

“Before taking out a loan, the small business owner should thoroughly understand why they need the money and what their options are in terms of getting that financing,” says Steve Milan, a partner with Fuse Financial Partners in Charlotte, NC. “There are a great many sources of alternative financing, but the terms can be very confusing and may ultimately be quite expensive.”

 

Who's Lending to Whom, and Why?

 

As more investors enter the lending market in pursuit of higher returns, alternative lending sources are increasing rapidly. Here are a few of the much-talked-about options that you may want to explore:

 

  • Microloans: Small Business Administration Loans ranging up to $50,000.
  • Crowdfunding: Through online platforms, business can raise money for the development and/or launch of new products and services.
  • Peer-to-Peer lending: Pairs investors with business owners in need of capital.
  • Merchant Cash Advances: Advances funds based on future debit and credit card receivables.
  • Factoring: Loans made on outstanding invoices.
  • Asset-based lending: Loans based on assets such as inventory or accounts receivables.

 

For the most part, alternative lenders make loans based either on assets or cash flow, Milan says. The major advantages of alternative financing is that it makes available funds for businesses that don’t have the track record, assets, or cash flow to qualify for a traditional bank loan. The major disadvantages are the fees and interest rates.

 

“There’s financing available for small business owners who need it,” Milan says. "The trick is that such financing is confusing and expensive. The terms can be difficult to figure out because of the combination of interest rates and fees.”

 

When evaluating financing options, take a hard look at the interest rate and make sure you have a full understanding of all fees. Think about how much the loan will cost you in total so you can decide whether it's a wise move. Also keep in mind that the time from when you apply for a loan to when you receive the money can vary by type of loan source and the individual lender.

 

Milan notes that rates and fees vary widely. Peer-to-peer lending rates, for example, run from 5.9 percent to 36 percent annually. Asset-based loans tend to end up in the low teens once you combine the interest rate and fees.

 

"It makes sense for small business owners to consider alternative lending anytime they need financing but a traditional bank loan is not the best option," Milan concludes. “The first step is to consider why the financing is needed and then conduct a profitability and cash analysis. Once the small business owner knows what types of financing are available, then it’s time to compare costs and terms and decide which route to pursue.”

 

 

 

 

 

Bank of America, N.A. engages with Inc. to provide informational materials for your discussion or review purposes only. Inc. is a registered trademark, used pursuant to license. The third parties within articles are used under license from Inc.. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.

 

©2015 Bank of America Corporation

The small business lending environment is improving. Preparing a strong case will enhance your ability to secure financing.

Inc-Article-Logo.gif


With interest rates still low and the economy improving, business lending is on firmer footing than at any time since the financial crisis. That means that businesses with sound financials, a comprehensive plan, and a thoughtful approach to the lending market are well positioned to secure the financing they need.

 

Preparation is essential, however, says Neil Berdiev, author of The Loan Financing Guide for Small Business Owners. “There are several key questions that you should be able to answer before you approach a bank: how much money do you need to borrow, why do you need to borrow the money, and when and how do you plan to pay the money back?” he says. “If you know your financials and what is driving your business results, and you are well prepared, you should be in good shape when you meet with a lender.”


Gathering the right documentation

Whether you bring your financial information with you to a meeting or email a packet immediately after, preparing at least three years of financial statements that demonstrate a history of profitability is a great place to start with your documentation. For a smaller, less well-established business, providing a thorough business plan can demonstrate to a lender that you’ve put careful thought into where you want the business to go and provide the context for the financing you seek. A marketing plan, cash flow projections, an analysis of your position relative to competitors, and even a succession plan can also be helpful in making your case for a loan.

 

The Small Business Association (SBA) notes that most lenders require small business owners to provide a personal credit history, personal financial statements, and personal guarantees from all principal owners. “Ensure your personal credit is in good shape by monitoring your credit report and regularly requesting your credit score,” Berdiev says. “Also watch how much other credit you have outstanding, because financial institutions are not going to want to go over a debt-to-income ratio of 36 to 40 percent.”


Choosing the right lender

Banks, credit unions, and community banks serve different markets and make loans of different sizes, so it makes sense to study the market before you approach a specific institution, says Berdiev. “If you’re plugged into a network of business owners who you trust, they can probably tell you which institutions make the size of loan you’re looking to get,” he adds. “Your accountant or attorney is another good resource.”

 

Beware of approaching just one institution based on a recommendation, however, because the friend or colleague who had a good experience with a particular lend may be in a much different situation than you are. One way to get a good sense of the entire market and what institutions may be in play for your type of loan is to call a number of commercial loan officers at area financial institutions. With some basic information in hand from all these resources, you’re in a better position to decide which lenders to approach.

 

 


Bank of America, N.A. engages with Inc. to provide informational materials for your discussion or review purposes only. Inc. is a registered trademark, used pursuant to license. The third parties within articles are used under license from Inc.. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.


Bank of America, N.A. Member FDIC.


©2015 Bank of America Corporation


Inc.

Understanding Debt Restructuring

Posted by Inc. Jun 24, 2015

Body_FileFail.jpgWhen loan repayments become a problem, the key is to take action before your small business faces a crisis.

 

As economic indicators continue to strengthen and access to credit eases, more small business owners are assessing their financing options. But borrowing always presents an element of risk, and it’s wise to educate yourself in advance about how to manage your debts if your small business experiences slower than projected growth, a change in cash flow patterns, or market changes that create debt repayment challenges.

 

You may already be familiar with the benefits of refinancing to obtain more advantageous credit terms. But debt restructuring is a more complex matter: rather than a means of improving terms, it is a strategy for pulling a company out of crisis. Charles Fraas, principal owner of Fraas Advisory Services, explains that there are four ways to exit from a debt crisis: you can improve your company’s performance, sell some of its assets to generate cash, secure an outside investment, or negotiate a loan restructure.

 

Identifying problems, averting crisis

“Knowing that those are the only options, the first step in figuring out how you’re going to resolve a debt problem or prepare yourself to resolve a debt problem is to understand what your business can produce and why it is not producing,” he says. The next step is to weigh your options for resolving the problem. “You either are going to have to cut expenses, somehow squeeze out profitability from some other part of your business, or grow your business. If you don’t do one of those things, you’re going to have a debt crisis on your hands.”

 

A further complication for many small business owners (particularly sole proprietors) occurs when the business loan is backed by a personal guarantee. Fraas cautions that this can make debt restructuring “a much more limited option” because the lender may prefer simply to seize the assets of the person who backed the loan. But it may still be possible to present other solutions for the lender’s consideration.

 

Contingency planning and collaboration

If you anticipate—or are already experiencing—a problem in meeting your debt repayment obligations, Fraas advises that you develop contingency plans before you address the matter with your financial institution. “Banks for the most part do not want to call a loan, do not want to have to grab the collateral. That is an expensive, messy process,” he says. “It is up to you, though, to bring in a very good plan and explain to them what the expectations are for repayment. You don’t want to ring an alarm bell until you really know what you’re going to need from the bank.”

 

It’s equally important to understand what the bank needs from you, such as a demonstration that the plan you’re presenting will generate sufficient free cash flow to allow you to meet your debt obligations. “That is the gauge of whether or not you will be able to satisfy your debts,” Fraas says. 

 

The goal is to preserve your relationship with the lender and gain an ally in bringing your company to full recovery. By presenting a practical plan and delivering on your restructured commitments, you can avert a debt crisis, and in partnership with your lenders, put your company on a path to restored stability and prospects for long-term success.

 

 

 

Bank of America, N.A. engages with Inc. to provide informational materials for your discussion or review purposes only. Inc. is a registered trademark, used pursuant to license. The third parties within articles are used under license from Inc.. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees

provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.

 

©2015 Bank of America Corporation

Bizloans_Body.jpgFor small business owners, it’s essential to get input from trusted advisors to plan strategic use of lending options and promote optimal growth

 

As a small business owner, you’re constantly dealing with immediate demands and day-to-day operations that can consume all your energy and distract you from your long-term goals. Putting out all those fires, however, often causes business owners to lose track of their long-term financial position and requirements. Have you taken the steps necessary to ensure that your lending strategy and plans align with and support your performance and growth targets for the company?

 

Plotting a lending roadmap is essential not only to achieve sustained growth, but also to ensure that you can meet your short-term lending needs. “You start at where you want to end up, and then plan your steps to get to that point,” says G. Scott Haislet, a CPA and tax attorney in Lafayette, California. To do that successfully, you’ll want to enlist the assistance of trusted advisors who can offer insights, challenge and test your assumptions, and provide an independent outside perspective on the lending component of your plans for small business growth.

 

Managing costs and maximizing assets

For example, they can help you to examine your current borrowing practices in the context of your long-term objectives. Could you do a better job of separating your business and personal credit histories and establishing a stronger credit record for your small business? What market opportunities might arise that could spark a growth spurt at your company, and in that scenario, would your current lending options be able to keep pace? Even if you don’t need access to a greater amount of financing today, what can you do now so you’re ready in advance when that need arises? Working with your accountant and financial services provider can help you determine the most accurate and profitable answers to those questions.

 

Similarly, they can work with you to optimize the use of your existing credit and financing resources. For example, if you’ve been planning to take out a loan for the purchase of equipment or vehicles, they can help you calculate whether it would be more productive to finance those through leasing. That would allow you to conserve your available or prospective credit for longer-term needs.

 

Moving from transactions to trust

To get this level of input, you need to nurture relationships that are advisory in nature, not merely transactional. “Find an accountant who’s willing to take an interest in not just the numbers or tax strategies in the business,” Haislet says. “You might have a relationship with an accountant who does financial statements for you, not just tax returns. The financial statement should have some value not just because the bank needs it for a loan covenant, but also as a management tool.”

 

Building these relationships with your accountant, financial services professional, and other advisors takes time, but the return on the investment can be significant. By incorporating independent perspectives and insights into your lending and growth plans, you position your company to make the most of its opportunities for long-term profitability, growth, and sustainable success.

 



Bank of America, N.A. engages with Inc. to provide informational materials for your discussion or review purposes only. Inc. is a registered trademark, used pursuant to license. The third parties within articles are used under license from Inc.. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees

provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.

 

©2015 Bank of America Corporation


Inc.

Cost management as a strategy.

Posted by Inc. Mar 15, 2013

Cost-cutting and cost-containment tactics and techniques are common to any business. Companies routinely look for ways to save money in various areas or simply reduce budgets by a percentage amount, requiring employees to make the tighter financial parameters work.

 

While it’s often used interchangeably with those two terms, “cost management” is another matter entirely, says Edward Blocher, professor of accounting at the University of North Carolina’s Kenan-Flagler Business School in Chapel Hill, North Carolina. Cost management is a strategic approach to controlling costs by examining the benefit of the expenditures and finding ways to gain the highest levels of efficiency and effectiveness in each area of business. Its form varies depending on the type of business, says Blocher. For an electronics manufacturer faced with demanding customers who also want highly competitive price points, cost management might require a program of process improvement to boost productivity and eliminate waste. Approaches such as total quality management and Lean Six Sigma are common in this type of business.

 

In other types, cost management might include target costing, where the organization delivers a product or service within a particular cost per unit or per project. In such cases, the company evaluates the features of the product or service and eliminates those which are unimportant to the customer in favor of investing more in the features that are valued while remaining within the defined cost structure. “It’s an approach that was developed by Toyota and is now widely used,” says Blocher.

 

Derrick J. Rebello, CPA, director of accounting and auditing services at Westwood, Mass.-based accounting and business advisory firm Gray, Gray and Gray, LLP, urges his clients to take a long-term look at their expenditures and incorporate strategic approaches to reduce them. While it sounds counter-intuitive, this may require spending more money upfront. For example, examining core business functions and streamlining those operations in-house while outsourcing peripheral business functions can be an effective cost-management strategy. A company may invest in a call center to better manage in-bound sales and customer service calls, but outsource marketing and use a cloud-based communications platform to significantly reduce its information technology staffing and equipment needs, reducing costs significantly over time.

 

Staffing is another area where cost management can yield significant savings. Making changes to staffing levels according to work flow instead of staffing equally at all times can reduce or eliminate backlogs and improve efficiency. Developing additional skills through cross-training can also be an effective way to manage staffing costs, says Rebello.

 

“Some of my clients are just embracing the attrition—employees moving or leaving—and getting their employees to do more with less, but letting them be in charge of it and be able to drive it,” he says. By developing more skills in your employees and training them to do different jobs, you may find that job descriptions change and you can get more done with fewer people on the payroll, he says.

 

If you’re having trouble thinking strategically about how your costs can be managed, it might be a good idea to get counsel from a trusted financial advisor who can give you an objective analysis and ideas, says Rebello. Sometimes, adopting new strategic initiatives requires new ways of thinking or outside ideas, he says.

 

by Karl Stark and Bill Stewart


Don't overcomplicate your pitch to investors. You'll have more success with a business case that can be clearly stated in under a minute.

 

We recently met with a CEO who has built a number of businesses and is currently leading a private equity-backed business in the security space. Within the first minute of our conversation, it became clear why investors were backing him. In this short time span, he clearly defined his marketplace and his company's role in creating value in simple terms.

 

It struck us how obvious this was, but it reminded us of how rarely we see CEOs take this approach. Many entrepreneurs are wired to try to impress others, including potential investors, with the depth of their technical knowledge or complex approach to solving a customer problem. Many of us foolishly believe that, in order to be innovative, a business idea needs to be genius in its complexity.

 

The reality is that investors, like any business decision-makers, are drawn toward simplicity. This means the investment case you propose must be simple in both concept and communication. If you can't communicate a simple investment case, you probably don't have a winning business idea.

 

Try these three steps to build a simple investment case:

 

1. Frame the market and current customer demand.

 

Every investment concept begins with the logic of a customer. Someone has to have a need for your product or service, and the easiest way to prove that is to point to the existing market for that service. Outline the current market size, what customers are currently spending annually on that customer need, and the driver of that customer demand to demonstrate why the demand will continue.

 

2. Describe the segment of the market you're aiming to capture.

 

What customer segment or segments of the market does your product or service appeal to? If you have a product or service that is differentiated from the current offerings, it should appeal to a specific segment more than others. Describe why you are targeting that segment and explain why the segment is profitable and sustainable.

 

3. State your sustainable competitive advantage.

 

What are you bringing to the market that will set you apart and maintain your competitive advantage going forward? If the investor is deploying capital into your business, she will expect a return on investment. The only way to receive a return on investment is to provide proof that you will be able to sustain profitability, even after competitors realize that you are gaining traction and attempt to replicate your solution.

 

The CEO of the security company was able to describe all of this to us in less than a minute. When using this framework on a credible business case, describing your case clearly and logically should be easy. If you have trouble, that's a sign that your business case is not as attractive as you thought.


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